Moody’s Analytics has put in writing what is becoming more evident by the day. The US will be the first country to reach herd immunity. Already, almost 25% of the population have been fully vaccinated, Covid-19 cases are falling and by July, herd immunity, which is around 70%–75%, should be reached.
As a result, people are likely to return to offices. Beneficiaries are likely to be Manulife US REIT (MUST), Prime US REIT, Keppel Pacific Oak US REIT (KORE), possibly United Hampshire US REIT and to a lesser extent Ascendas REIT and even ARA US Hospitality Trust.
As of April 6, 108 million in the US have been given at least one shot of the two-dose vaccine (Pfizer-BioNtech or Moderna) and 62 million are fully vaccinated. “On a seven-day moving average basis, vaccinations are running at 3.08 million (people), up from 2.08 million last month (March). Plugging this into our herd immunity calculation suggests this could be reached by mid-July,” says Moody’s Analytics in an April 7 report. According to the report, this timetable is sooner than Moody’s original baseline estimates.
The current US administration has made controlling Covid-19 and an economic recovery its main focus. However, on March 30, Tedros Ghebreyesus, director-general of the World Health Organization, along with several world leaders published a commentary that says, “The Covid-19 pandemic has been a stark and painful reminder that nobody is safe until everyone is safe.”
Nevertheless, as the US approaches herd immunity sooner than expected, US GDP growth is likely to rebound.
Office outlook linked to GDP
The outlook for US office is usually commensurate with GDP growth. In the latest International Monetary Fund forecast announced on April 6, US GDP in 2021 is likely to rise by 6.4%, at a faster clip than global GDP growth of 6%. The Institute for Supply Management’s gauge of manufacturing activity released on April 1 also hit its highest mark since December 1983. In addition, unemployment (excluding those who left the workforce) has dropped to 6% and is expected to continue to fall as the US economy opens up. Normally, unemployment in the office segment is even lower than the US’s overall unemployment.
All this should be music to the ears of Jill Smith, CEO of MUST’s manager. By all accounts, the REIT has had a challenging 2020. In fact, MUST had to provide for expected credit loss for one of its retail and F&B tenants. During its results briefing on Feb 8, Smith said the retail tenant had agreed to settle its arrears in full.
As at Dec 31, 2020, MUST’s physical occupancy was around 15%– 20% compared to its committed occupancy of 93.4%. Overall, MUST’s DPU fell by 5.4% y-o-y to 5.64 US cents in FY2020. As workers return to work though, carpark income could rebound too.
“We had lower car park income because seven out of our nine properties received income from car parking,” Smith explains. “As we look forward to a rapid reopening, we expect car park revenue to rebound as many people return to work and travel by car,” she indicates.
Also in February, during a results briefing, Barbara Cambon, CEO of Prime US REIT’s manager, says, “Our portfolio’s actual physical occupancy is in the 20% range because of the third wave. Surveys continue to show people will come back to the office, although the hybrid model prevails. We think over time we will continue to see our tenants returning to the office.” As at December 31, 2020, Prime US REIT’s committed occupancy was 92.4%.
Only 5.8% of MUST’s portfolio by gross rental income (GRI) is up for renewal this year compared to 8.8% of Prime US REIT. More than 12% of KORE’s portfolio (by GRI) is up for renewal. If the US recovery takes off, these renewals are likely to be a tailwind for the REITs.
Ascendas REIT’s US exposure
Elsewhere, Ascendas REIT is also likely to be a beneficiary of US herd immunity. Ascendas REIT has a sizeable US footprint, comprising 15% of its $14 billion in assets as at Dec 31, 2021. Following the acquisition of a European data centre portfolio, the US portion is down to 14% of $15 billion in assets.
On an absolute basis, Ascendas REIT has the largest exposure to the US among the REITs, but not as a portion of its assets. Some 7.1% of Ascendas REIT’s US portfolio by GRI is up for renewal.
The locally-listed US REITs have room to compress as compared to Ascendas REIT which is already trading at a yield of around 4.84%– 4.85% if distributions from the European data centre portfolio is added. The US REITs (excluding ARA US Hospitality Trust) are trading at yields of 7.4%–9%. At these yields, acquisitions would need to be mainly debt funded to make them accretive.
On the other hand, with herd immunity and sharply higher US GDP growth, these yields could compress, making it easier for these REITs to resume acquisitions.
