SINGAPORE (Mar 27): Although all S-REITs were sold down in recent weeks, REITs with US assets suffered a more serious decline due to events beyond their control. Primarily, in addition to fund redemption, the US financial sector is undergoing a credit crunch in spite of the quantitative easing programme unleashed by the US Federal Reserve. Hence the entire US financial sector is stressed including REITs, and commercial properties including office properties.
Keppel Pacific Oak US REIT (KORE) had almost halved this year, but was one of the top gainers week-on-week (see chart 1).
Among the US REITs, KORE has the most diversified assets with 13 properties, comprising campuses and a smattering of Grade A buildings. As such, it has a diversified tenant base with its top 10 tenants accounting for less than 20% of gross rental income. The technology sector accounts for 28.1% of the portfolio by net lettable area, and medtech and healthcare 8.2%.
However, professional services occupy 29.5% of NLA and if there is right sizing or downsizing, this could be a vulnerable sector.
In a recent briefing to analysts, KORE’s manager acknowledged that some tenants could ask for rental rebates and the manager will consider this for tenants with whom the REIT wants to build a long term relationship. Even though KORE owns properties in Houston, Dallas and Austin where shale oil companies are under tremendous stress, none of its tenants are in the sector.
During times of stress, recession or depression, KORE tenants are unlikely to move. So, as the US economy is believed to be contracting, that could be an additional plus point for KORE.
In FY2019, both actual and adjusted DPU rose by 11.3% and 31% y-o-y respectively to 6.01 cents. At this level, KORE’s yield is more than 11% and its units are trading at just 0.64 times NAV. Assuming that DPU and NAV fall by 10%, KORE’s yield would be 10.7% and price to book would be 0.7 times.
While KORE’s manager says it is too early to gauge the impact of Covid-19 on the portfolio, the REIT’s properties are in markets such as Denver, Seattle and Houston which should experience a sharp rebound once the pandemic is over and the US economy recovers.
“While activities are expected to slow down in the next few months as the US battles with the spread of Covid-19, [KORE’s manager] believes the recovery will be strong and quick,” DBS Group Research says in an update.