SINGAPORE (Mar 20): DBS Group Research has “buy” calls on all three US office Singapore REITs. It has target prices of $1.15 on Manulife US REIT, $1.05 on Prime US REIT and 90 cents on Keppel Pacific Oak US REIT.
Following the recent development of the Covid-19 spreading to North America and Europe that could tip these economies into a recession, the share price of US Office SREITs has taken a big hit, falling off a cliff by 47%-50% from its peak only in January this year.
At current prices, US Office SREITs are now trading at 11% to 16% yield and 0.5 time to 0.7 time price-to-book.
In a Friday report, analyst Rachel Tan says, “We think the downside risks is limited in the near term as US Office REITs have a long WALE of 4-6 years and the leases expiring in FY2020 are below 8%.”
“Also, at current prices, we believe US Office SREITs have priced in a potential recession. While information is limited, we gather that occupancies fell close to 80% during the GFC vs. the current range of 94%-96%,” Tan adds.
Based on ballpark estimates, if FY2020 NPI is lowered by 20% on current prices, US Office SREITs would trade at 8%- 12% yield.
DBS channel checks with US office REITs have shown that while leasing interests have been good in 1Q20, US office REITs expect leasing activities and potential acquisitions to slow down due to movement restrictions and work-from-home arrangements.
However, the near-term risks are still limited as expiring leases in FY2020 range between 4% and 8% and all three US office REITs indicated that majority of the leases have no major break/pre-termination clauses.
Currently, there are no rental rebates for tenants. However, Keppel Pacific Oak US REIT (KORE) said that the tenants are likely to be covered by business interruption insurance and could claim if the conditions of business interruptions are met.
Furthermore, given the existing situation, US Office REITs could expect delays for any potential acquisitions.
