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Home REITs 3 Commercial REITs That Are Well-Positioned to Pay Out Higher DPU

3 Commercial REITs That Are Well-Positioned to Pay Out Higher DPU

If you’ve been observing REITs for the last eleven months, you will be aware that the worst-hit ones are from the hospitality and retail sub-sectors.

Hospitality REITs have had to slash their distribution per unit (DPU) drastically to conserve cash and wait for the recovery amid a pandemic.

Retail REITs have had to dole out tenant relief measures to prop up ailing tenants, resulting in sharp drops in DPU as well.

Commercial REITs, on the other hand, have been much less impacted thus far.

Although there has been talk of a decline in demand for office space due to more people telecommuting, this has yet to translate to lower occupancy or rental rates.

Here are three commercial REITs that have reported resilient numbers and that look poised to pay out higher DPU.

Keppel Pacific Oak US REIT (SGX: CMOU)

Keppel Pacific Oak US REIT, or KORE, is a REIT that invests in a portfolio of commercial assets located in key growth markets in the US.

Its portfolio consists of 13 freehold office buildings and business campuses located in eight markets, and have a combined value of US$1.3 billion.

The REIT has grown its portfolio value by 50% since its IPO back in Nov 2017, and the number of buildings within it has increased from 11 to 13 over the same period.

In its third-quarter business update, the REIT reported a strong set of numbers.

For the first nine months of 2020, gross revenue increased by 17.8% year on year to US$105 million, while net property income (NPI) rose 14.1% year on year to US$62.4 million.

Distributable income increased by 17.7% year on year to US$43.8 million.

No distribution was declared for the quarter as the REIT pays out distributions half-yearly, but if we check back to the first-half results, KORE paid out a half-year DPU of US$0.031.

The annualised DPU is thus US$0.062 and the REIT’s shares offer a distribution yield of around 8.7%.

The REITs financial and operating metrics remain sound.

As of 30 September 2020, it reported positive rental reversion of 14.1% with portfolio occupancy by net lettable area at 92.8%.

Gearing remains low at 37.7% with no refinancing requirements till November 2022.

OUE Commercial REIT (SGX: TS0U)

OUE Commercial REIT, or OUECR, bills itself as one the most diversified REITs in Singapore.

The REIT’s portfolio contains seven properties, with six in Singapore and one in Shanghai, that are worth around S$6.8 billion.

These properties cover a mix of property sub-types, with commercial taking up the bulk of revenue at 63.8% for the third quarter, hospitality at 23.8% and retail at 12.4%.

This mix of properties has demonstrated its resilience, with OUECR reported a 12% year on year increase in revenue for the third quarter.

Distributable income rose 15.8% year on year to S$34.2 million.

However, rental rebates of S$5 million was handed out to tenants during the third quarter to mitigate the adverse impact from the pandemic.

For the first half of 2020, DPU fell by 40% year on year to S$0.01 as S$13.8 million out of the S$68.3 million available for distribution was retained by the REIT for financial flexibility.

When conditions improve, these retention amounts may be slowly released, thus offering a boost to future DPU.

Manulife US REIT (SGX: BTOU)

Manulife US REIT is a pure-play US office REIT with a portfolio that consists of nine prime, freehold and trophy or class A quality office properties.

The portfolio was valued at US$2 billion and had aggregate net lettable areas of 4.7 million square feet as of 30 June 2020.

Manulife US REIT’s portfolio has remained resilient despite the pandemic, with occupancy rate holding up at 94.3% as of 30 September 2020.

The REIT enjoyed position rental reversion of 7.9% for leases executed in the first nine months of 2020, and as of 23 October, managed to collect 98% of its rental income due.

Furthermore, leases coming due in 2020 and 2021 only make up 8.6% of gross rental income, and the bulk (>50%) of leases are only due in 2025 and beyond.

For the first half of 2020, the REIT’s DPU inched up by 0.3% year on year to US$0.305, as gross revenue and NPI both climbed by around 18% year on year.

The annualised forward dividend yield for Manulife US REIT stands at around 8.2%.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.