Five ‘laggard' S-REITs slated to outperform in 2021

UOB Kay Hian has named five S-REITs with attractive valuations that could represent opportunities for investors.

Often overlooked by investors in favor of blue-chip S-REITs, "laggard" S-REITs are expected to play catch-up to their blue-chip peers in 2021 as these trade at higher distribution yields and larger discounts to net asset value (NAV).

In a report, UOB Kay Hian analyst Jonathan Koh noted that whilst these laggard S-REITS have smaller market capitalisation, lower trading liquidity, and are usually not a component stock of major indices, the quality of their real estate portfolios could be comparable to blue-chip S-REITs.

Koh has named five S-REITs with more attractive valuations that could represent opportunities for long-term investors: Ara Logos Logistics Trust, Far East Hospitality Trust, Lendlease Global Commercial REIT, Suntec REIT, and United Hampshire US REIT.

Lendlease Global Commercial REIT (LREIT) is positioned to benefit from the recovery in visitor arrivals in 2022 thanks to its key property 313@Sommerset, as tourists account for 18% of shopper traffic at 313@Somerset.

More traffic will come from LREIT’s plan to redevelop a car park at Grange Road to serve as a dedicated event space.

The property boasts of a unique positioning due to its youth orientation and prime location on top of Somerset MRT Station. About 60% of leases by net lettable area (NLA) in the property have a step-up structure with average rental escalation at 2.7%.

The rise of e-commerce and online shopping is not a problem for United Hampshire US REIT (UHU REIT), with 70% of its base rental income derived from tenants whose businesses are deemed “essential”. Its top tenants include Walmart, BJ’s Wholesale Club, Ahold Delhaize, Lowe’s, and Home Depot.

All tenants have notedly been open for business since September 2020, and the REIT has a weighted average least expiry (WALE) of 8.4 years based on base rental income as of September 2020.

The UHU REIT’s self-storage facilities also benefitted from an outflow of population from New York City to suburban areas in New Jersey. The move-in rental growth for the self-storage sector has reversed sharply from a decline in Q2 2020 to a 12% growth in October 2020.

Meanwhile, Far East Hospitality Trust’s (FEHT) master lease structure was noted for mitigating the negative impact from the COVID-19 pandemic. Under this structure, fixed rents accounted for 72% of FEHT’s 2019 gross revenue from hotels and serviced residences.

Sponsor Far East Organisation (FEO), which owns 61% of FEHT, has a strong balance sheet and impeccable track record. FEO has also demonstrated that it is closely aligned with unitholders’ interest. FEO reduced the base fee from 0.3% to 0.28% of deposited property in January 2020, and also reduced performance fee from 4% of net property income (NPI) to 4% of annual distributable amount.

Suntec REIT’s property Suntec City Office is expected to maintain positive rental reversion as the average expiring rent is low at S$8.76 per square feet (psf) pm for 2021. Suntec City Mall will benefit from the return of employees to their offices, whilst convention attendees are expected improve shopper traffic and tenant sales.

Many of Suntec REIT’s development projects will make full-year contributions in 2021: 9 Penang Road in Singapore (30% stake), 477 Collins Street in Melbourne (50% stake), and 21 Harris Street in Sydney (100% stake).

Finally, Ara Logos Logistics Trust (ALOG) boasts a diversified tenant base, with its top 10 tenants accounting for 52.6% of gross rental income as of September 2020. Key tenants include DHL, DB Schenker and FedEx, which are global leaders in third party logistics.

Its maiden transaction post-reorganization—following the acquisition of Ara Asset Management of LOGOS—could drive it to expand by 28% in asset size and deepen its presence in Australia and the cold storage sector, noted Koh.

Ara Asset Management acquired LOGOS in 5 March 2020, and made the APAC logistics real estate developer and fund manager its global logistics real estate arm. The acquisition pipeline is sizeable with an AUM of US$10.2b, of which more than half is in Singapore, Australia and China.