Keppel Pacific Oak US Reit, Manulife US Reit and Prime US Reit Analysis

Introduction to KORE, Manulife US Reit and Prime US Reit 

Keppel Pacific Oak US REIT (KORE) is a Singapore listed US REIT focusing on investing in income-producing commercial assets and real estate-related assets in key growth markets of the United States (US) with favourable economic and office fundamentals that are above the national average, so as to provide sustainable distributions and strong total returns for Unitholders. Keppel Pacific Oak US REIT is managed by Keppel Pacific Oak US REIT Management Pte. Ltd., which is jointly-owned by two Sponsors, Keppel Capital Holdings (Keppel Capital) and KBS Pacific Advisors (KPA) which are incorporated in Singapore.

Keppel Capital is a premier asset manager in Asia with assets under management of approximately S$29 billion as at end-2018, Keppel Capital has a diversified portfolio that includes real estate, infrastructure and data centre properties in key global markets.

KBS Pacific Advisors (KPA), is able to leverage on KBS, in which the former owns one third of the latter, one of the largest owners of office properties across the US. Since inception in 1992, KBS has completed over US$33 billion of transactional volume. With over 180 personnel across key US cities, KBS manages over US$11 billion of assets in seven listed REITs and nine private funds.

Manulife US Real Estate Investment Trust (MUST) is a Singapore listed REIT that primarily invests in a portfolio of income-producing office real estate in key markets in the United States (U.S.), as well as real estate-related assets. MUST’s portfolio comprises eight prime, freehold and Trophy or Class A quality office properties strategically located in California, Atlanta, New Jersey and Washington, D.C.Metro Area.

MUST is managed by Manulife US Real Estate Management, a wholly owned company by the Sponsor, The Manufacturers Life Insurance Company, part of the Manulife Group. Manulife Group’s parent company, Manulife Financial Corporation, is a leading international financial services group providing forward-thinking solutions to help people with big financial decisions. Manulife also provides financial advice, insurance and wealth and asset management solutions for individuals, groups and institutions.

Prime US Reit is a Singapore listed REIT with an investment focus in stabilised income-producing office and real estate-related assets in the United States of America (“U.S.”). Prime US REIT offers investors a unique exposure to a high-quality portfolio of 11 prime and freehold office properties, strategically located in 9 primary markets in the U.S., with a total Appraised Value of approximately US$1.2 billion.

KBS Asia Partners is the sponsor of Prime US REIT. The sponsor’s owners are the founding partners of KBS, one of the largest US commercial real estate managers, with US$11.6 billion worth of AUM and had invested or managed about US$25 billion since its inception.

Portfolio Overview

Firstly, we shall look at the occupancy rate of all three REITs. MUST has the highest occupancy rate of 97.2% while Prime US Reit comes in second place at 96.7% and KORE’s occupancy rate stands at 93.8%. 

Comparing the lease expiry of the three REITs for the next three years, 15.7% of MUST’s gross rental income will be expiring in the next three years compared to 19.4% in Prime US Reit and 27.4% in KORE. This results in WALE for MUST to be the longest at 6.2 years, Prime US Reit coming in second at 5.5 years while KORE has the shortest WALE at 4.1 years. I am a fan of longer WALE as having longer WALE means that the management does not need to find tenants thus providing stability in rental income. However, the con of having a longer WALE is that if the REIT will miss out any opportunity of rising market rental rates unless there are rental review in the lease. 

MUST made a nice comparison comparing leases in USA and Singapore. US office leases are longer than the one in Singapore. On an average, US office leases are 5-10 years long with annual rental escalations on average 2% – 3% or mid-term escalations average of 1% – 2%. On the other hand, the leases in Singapore are 3 year on average with no rental escalations. It is to be noted that the information above may not represent the entire US or Singapore market. 

With that in mind, it is clear cut that having longer WALE is preferred for stability and since there are annual rental escalations of average 2%-3% every year. However, one must be informed of the office market cycle which can be obtained from JLL or Cushman & Wakefield. According to Cushman, accelerating and slowing market cycle are favourable for landlord. As for JLL illustration, peaking and rising phase are better for the landlord as rental value growth is either accelerating or slowing. 

With more than 480 tenants, KORE’s top 10 tenants contribute 21.2% of cash rental income compared to MUST’s 38.9% and Prime US Reit’s 43.5%, which has 140 tenants and 187 tenants respectively. Prime US Reit’s top tenant – Charter Communications contributes the most compared to the other two REITs at 7.9% On the other hand, KORE and MUST’s top tenant only contributes 6.7% and 3.7% respectively. 

I find it surprising that despite Prime US Reit having more tenants than MUST, the top 10 tenants for Prime US Reit is higher than the latter. In summary, I will feel safer investing in KORE as the tenant concentration risk is just 21%. 

Debt

US Prime Reit has the highest average debt tenure of approximately 5.6 years

In this section, we will take a look at the financial health of the REITs. Debt is very important for REITS and investors as this is one of the few methods that REITS finance to acquire properties. We will look into the Gearing Ratio and Interest Coverage Ratio. Gearing Ratio of KORE stands at 38.5% while MUST and US Prime Reit figure stands at 37.1% and 37% respectively. A lower gearing ratio will be preferred in this case.

For Interest Coverage Ratio, there is no available information for Prime US Reit. Therefore, we will only be comparing KORE and MUST. KORE’s Interest Coverage Ratio stands at 4.6x compared to MUST’s 3.9x. Interest Coverage Ratio means how much times its EBIT can cover the Interest Expense. It also determines how easily a company can pay interest on its outstanding debts. Therefore, a higher Interest Coverage Ratio will be preferred. 

US Federal Reserve has been cutting interest rates for the past quarters. Although it is good to hedge interest rate, the percentage of fixed rate should not be that high in anticipation of further rate cuts. We shall look into the percentage of fixed rate loans for all three REITs. About 83% of KORE’s loans are fixed. This is similar to Prime US Reit where 85.1% of its loans are fixed. On the other hand, 96.1% of MUST’s loans are fixed. In addition, the weighted average interest rate for KORE is the highest among the REITs being compared at 3.74%. MUST has the lowest average interest rate at 3.32% while Prime US Reit average interest rate according to its IPO prospectus will be at 3.45%. In a rising interest rate environment, it will be wise to select REITs that have higher percentage of debts on fixed rates. When debts are on fixed rate, it means that the management has already hedged its interest rate and REITS will not be affected by any rising interest rate. However, with the recent announcement by the Federal Reserve cutting interest rates, a lower percentage of debts on fixed rates will be preferred as REITs will be paying more interest since the majority of its loans are on fixed rates thus reducing its distributable income to unitholders. 

Closing Thoughts

All three REITs portfolios are solid. What stands out the most is MUST’s occupancy rate and WALE. Its occupancy rate and WALE are the highest among the REITs compared at 97.2% and 6.2 years respectively. I feel that this is really a respectable figure knowing that the average vacancy rate in US is very high at 14.2% according to JLL. A concern for MUST and Prime US Reit will be its top 10 tenant concentration risk at 38.9% and 43.5% are on the high side compared to KORE’s 21.2%. As for debts, I like that MUST has the lowest weighted average interest rate at 3.32%, 96.1% of its loans are fixed in an environment when US Federal Reserve has already started cutting its interest rate.


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