KORE, Prime US REIT Less Impacted By Valuation Drop Of US Offices
USA – RHB Research stated that compared to Manulife US REIT, which saw a 10.9 percent drop in the valuation of its office properties in the United States, Prime US REIT and Keppel Pacific Oak US REIT (KORE) have a smaller risk of recording a huge drop in their portfolio valuation, reported The Business Times on Wednesday afternoon (4 January, SGT).
The US office properties of the two other Singapore-based real estate investment trusts (S-REITs) “are more in the secondary growth cities and thus should be less impacted compared to Manulife US REIT’s,” explained RHB Research analyst Vijay Natarajan.
DBS analyst Derek Tan agrees, elucidating that any change in asset valuations “really depends on the cities” where the office assets are situated, even though average office occupancy in the US remains below pre-pandemic levels.
Moreover, the market watchers pointed out that Prime US REIT and KORE’s gearing level are unlikely to reach close to the limit set by the city-state’s central bank after that of Manulife US REIT reached 49 percent due to higher discount rates and capitalisation rates for certain office assets, in addition to the continued decline in office occupancy of markets where the office buildings are situated.
As per the Monetary Authority of Singapore (MAS), if the minimum adjusted interest coverage ratio is at 2.5 times, S-REITs must maintain aggregate leverage at under 50 percent. But it’s lowered to 45 percent if the interest coverage ratio drops below 2.5 times.
“Manulife US REIT’s sharp valuation decline indicates that the US office market remains in a state of flux. (But) I don’t expect the other two US office REITs to be in the same boat as Their current gearing levels are much lower at below 40 percent,” Natarajan noted.
One reason that Prime US REIT and KORE are unlikely to suffer the same fate as Manulife US REIT, is that the first two have lower leverage levels.
As of the end of last September, KORE’s aggregate gearing level hit 37.5 percent with an interest coverage ratio of 4.4 times, while that of Prime US REIT stood at 38.7 percent and 4.5 times, respectively. In comparison, that of Manulife US REIT reached 42.5 percent and 3.4 percent during the same period.
“As interest rates have spiked up sharply since the second half of 2022, we think the interest coverage ratio could drop below 2.5 times by end-2023 – indicating that remedial measures are needed soon,” said Natarajan, who estimated that Manulife US REIT’s interest coverage ratio decreased to 3.1 times by the end of December 2022.