Listed US office REITs post higher yields than SREITs

US office REITs have longer WALEs ranging from four to six years unlike their Singapore peers.

SGX-listed US office REITs offer a yield spread of 6.1% to 10-year US yields, which is nearly double the size compared to SREITs’ 3.4%, according to an analyst report by DBS Group Research.

The decline in the US 10-year Treasury yield since end-2018 and the strengthening USD-SGD exchange rates are said to have made US office REITs’ yield spread more attractive and the price index has since risen 46%.

The widening US office REITs’ yield spread, coupled with the compression in SREITs’ yield spread, has brought the difference between the two at its widest at 2.7% which is a 2.4ppt increase since end-2018.

“As such, we believe that US Office REITs could be an attractive alternative to S-REITs with more room to expand if the Fed cuts rates further,” said Rachel Tan, analyst at DBS Group Research.

As a result, US office REITs are projected to generate an average distribution per unit (DPU) of c.5.4% in FY2020-2021. This figure will be supported by strong sponsors and visible growth engines, coupled with acquisitions.

Furthermore, US office REITs have long weighted average lease expiry (WALEs) ranging four to six years unlike its Singapore-focussed peers. Tan noted that only 5-7% of leases are expiring in FY2020 and 7-14% in FY2021. “The US Office REITs thus display steady organic growth trends underpinned by positive leasing spreads for roll-over leases in the coming two years,” she added.

Amongst US office REITs, the report noted that Manulife US REIT (MUST) is seeing increased liquidity and visibility amongst investors and trades at a premium (6.6% yield) to the other two younger REITs, Prime US REIT (Prime) and Keppel Pacific Oak US REIT (KORE). However, Prime and KORE offer better value at yields of c.7.2% and c.8.7%, respectively.

Despite the REITs’ higher yield, Tan said that its leverage on GDP growth poses a risk and that the market may not have priced in lower dividend payout ratios to fund tenant incentives or refurbishments.

Based on a 95% payout, the yields are deemed attractive at 6.2% to 8.2%. US Office REITs’ yield is currently trading at 7.2%.