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Is Now A Good or Bad Time To Buy Hospitality and Office REITs?

Are Singapore’s most popular passive income engines on sale?


With Singapore reverting to a “Phase 2 (Heightened Alert)” to curb the spread of COVID-19, the office and hospitality REITs look to be some of the biggest losers in the stock market.

As of this article’s writing, the largest office REITs in Singapore have all traded down relatively sharply when the latest announcement was made on 14 May 2021. Local investors must now be wondering if this is a good time to buy a larger chunk of Singapore Office REITs or whether deeper price cuts will occur going forward.

Read Also: 4 Stocks Affected By Phase 2 (Heightened Alert): Sheng Siong (OV8); UG HealthCare (8K7); SIA (C6L); CapitaLand Integrated Commercial Trust (C38U)

The logic of asking this question is straightforward. Investors typically aim to buy at a good value (for the right companies) when there’s fear in the markets.

How Hospitality REITs Have Fared?

Hospitality REITS    

Price

Trailing Twelve Month Distribution Yield Percentage Down/Up Past 5 Days
1 ARA US Hospitality Trust
(SGX: XZL)
US$0.48 8.67% -7%
2 Ascott Residence Trust
(SGX: HMN)
$1.00 2.94% -4%
3 CDL Hospitality Trust
(SGX: J85)
$1.20 4.74% -4%
4 Far East Hospitality Trust
(SGX: Q5T)
$0.58 3.48% -4%
5 Frasers Hospitality Trust
(SGX: ACV)
$0.50 2.41% -5%

Hospitality REITs mostly combine a mix of service apartments and hotels with varying mixes among the five. Note that in terms of size, Ascott Residence Trust (ART) is the largest, followed by CDL Hospitality Trust, Far East Hospitality Trust, Frasers Hospitality Trust, and ARA US Hospitality Trust.

The majority of the hospitality REITs have international portfolios, rather than just concentrated in Singapore.

For example, ARA US Hospitality Trust’s portfolio of 41 hotel properties is all located in the US.  Meanwhile, ART – which has a Singapore presence – has a portfolio of 86 properties in 38 cities across 15 countries in Asia Pacific, Europe and the US.

Read Also: Step By Step Guide To Using SGX Stock Screener To Find The Best Undervalued Stocks For Value Investing In Singapore

Likewise, CDLHT currently owns 18 properties with a total of 4,631 hotel rooms, comprising six hotels and a retail mall in Singapore, two hotels in Australia, one hotel in New Zealand, two hotels in Japan, two hotels in United Kingdom, one hotel in Germany, one hotel in Italy and two resorts in Maldives.

Frasers Hospitality Trust has a widely diversified portfolio of properties – 15 prime locations across 9 key cities in Asia, Australia, and Europe.

Far East H-Trust’s portfolio is the only one that is entirely exposed to the Singapore market. It has 13 properties, comprising 9 hotels and 4 serviced residences, strategically located within close proximity to the CBD.

How Commercial REITs Have performed

Commercial/Office REITs    

Price

Trailing Twelve Month Distribution Yield Percentage Down/Up Since Past 5 Days
1 Cromwell European REIT (EUR)
(SGX: CWBU)
€0.495 5.69% 0%
2 Elite Commercial REIT (UK)
(SGX: MXNU)
£0.665 13.7% -1%
3 IREIT Global
(SGX: UD1U)
$0.64 7.49% -3%
4 Keppel REIT
(SGX: K71U)
$1.17 4.5% -3%
5 Keppel Pacific Oak US REIT (USD)
(SGX: CMOU)
US$0.725 9.79% -2%
6 Manulife US REIT (USD)
(SGX: BTOU)
US$0.73 7.73% -1%
7 OUE Commercial REIT
(SGX: TS0U)
$0.375 6.48% -5%
8 Prime US REIT
(SGX: OXMU)
US$0.86 7.08% -2%
9 Suntec REIT
(SGX: T82U)
$1.49 5.38% -6%

 

 

Commercial REITS are generally larger and have more concentrated portfolios compared to Hospitality REITs in Singapore. The current share price pressure seen in the Singapore market is mostly a function of Singapore’s Phase 2 “Heightened Alert” rather than a global event. Thus, we should expect to see REITs which are exposed to Singapore market more affected.

This may also be where most of the opportunities are – as there could be a quick recovery or a prolonged extension of the safe management measures.

5 Top Yielding Hospitality and Office REITs As Of 14th May 2021

Name Ticker Trailing 12 Month Yields
1 Elite Commercial REIT SGX:CNNU 13.7%
2 Keppel Pacific Oak US REIT SGX:CMOU 9.79%
3 ARA US Hospitality Trust SGX: XZL 8.67%
4 IREIT Global SGX:UD1U 7.49%
5 Prime US REIT SGX:OXMU 7.08%

 

5 Lowest Yielding Hospitality and Office REITs As Of 14th May 2021

Name Ticker Trailing 12 Month Yields
1 Frasers Hospitality Trust SGX:ACV 2.41%
2 Ascott Residence Trust SGX:HMN 2.94%
3 Far East Hospitality Trust SGX: Q5T 3.48%
4 Keppel REIT SGX:K71U 4.5%
5 CDL Hospitality Trust SGX:J85 4.74%

 

Are REITs Trading At Discounts?

Warren Buffett likes to say that the markets are popular voting machines in the short term and weighing machines in the long term.

In other words, the market tends to get things right in the long term and get things wrong in the short term.

So, are the attractive dividends shown above a sign the market got it wrong? Or a sign that the market knows something you don’t?

Why Dividend Yield Matters

Dividend yield is calculated using the dividend each shareholder is entitled to per share divided by the share price.  The higher the yield, the more attractive a company usually is.

But consider crowd psychology for a moment. For example, if you hold a single share of REIT A which is trading at $5, and REIT A has a declared dividend of $1 per year, its dividend yield is $1/$5 = 20%.

What happens if REIT A’s share price plunges because of the ongoing COVID-19 uncertainties (like what has happened with office and hospitality REITs in Singapore)?

Investors are willing to sell at lower prices because they foresee lower dividends in the future and potentially greater uncertainties of more impacts from COVID-19 going forward. Share prices may trade down from $5 to $4. The perceived yield now is higher. At $4 a share, the yield for REIT A becomes 25% (compared to 20%).

Unfortunately, when high dividend-paying companies/REITs face cash flow constraints, the yield is the first thing to go – because they are only able to earn less profits.  When this happens, share prices may correspondingly decline.

For example, the dividend of REIT A may drop to $0.80 – which will bring its dividend yield back down to its original 20%. If investors think the company will continue to be even more severely affected, its price may drop further in view that dividends will continue dropping.

Now that we are aware of the risks, what are the rewards?

The reward is simply that sometimes, the markets get things wrong, and careful study of the companies behind the shares can inform a great investment.

For example, the logical question right now is that should REITs with property portfolios located outside of Singapore be as greatly affected as those with properties primarily in Singapore?

Investors must do the careful study now to reap the benefits later as and when share prices start plunging in reaction to negative news, whether it’s COVID-19 now or some other economic shock later.

Read Also: Complete Guide To Investing In Singapore REITs

Cover Image Credit: Raymond Quek

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