Cohen & Steers Capital Management has been weaving in and out of Digital Core REIT (DC REIT) this year. After paring its stake on May 31 by selling 398,500 units on the market for an average of 58.03 US cents (79.12 cents), the fund manager bought back units on June 25, and divested units on June 27. As at end-June, Cohen & Steers’ stake in DC REIT is down to 6.91% from a high of 7.05% during the month.
Nonetheless, in a report for July, Cohen & Steers makes a case for owning US REITs. According to the fund management company, in the US, the supply of various asset classes has fallen, curtailed by tight financial conditions. The US Federal Reserve Board raised its Federal Funds Rate (FFR) from 0%–0.25% as at end-2021 to 5.25%–5.5% by July 2023, in the most accelerated rate hike pace in living memory. As a result, [construction] starts as a percentage of stock has fallen to low levels. For instance, for industrial property, starts are down 50.1% from the peak in 2022 to only 1.6% of stock. Similarly, multi-family starts are down 48.7% from their 2022 peak to 2% of stock.
“Fundamentals remain resilient. Demand is healthy, albeit decelerating, while supply is curtailed due to tighter financial conditions,” Cohen & Steers says.
According to the fund manager, this is a good time to own REITs. Valuations relative to the broader equity market are meaningfully below the historical median. “Attractively priced equity and REITs’ access to the unsecured bond market could allow them to take advantage of external growth opportunities,” the Cohen & Steers report says.
Interestingly, Cohen & Steers points out that REITs in the US returned 18% during the 12 months following Fed hold periods after rates peaked compared to 3% when the Fed’s cutting period began.
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Despite Cohen & Steers’ optimistic outlook on REITs, on July 2, Daiwa Securities Group sold 310,000 Digital Core REIT units at an average of 56.4 US cents per unit. The divestment takes Daiwa Securities’ stake in DC REIT to 6.97% from 7% previously.
Separately, DBS Bank bought 800,000 Keppel REIT units for $688,000 on June 10. On June 26, Keppel REIT issued A$175 million ($158.54 million) green floating rate notes (FRN). The notes will bear interest at a floating rate based on the bank bill swap reference rate (BBSW) plus an agreed spread. The notes mature on June 26, 2027. The advantage of an FRN is that as the central banks of developed markets turn less hawkish and move into a holding and cutting cycle, the interest rates on the FRN could also fall. The Fed is widely expected to cut its FFR in September by at least 25 bps which could prompt an easier monetary policy by the Reserve Bank of Australia.
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The A$175 million FRN is to partly finance the acquisition of a 50% stake in 255 George Street, Sydney, that meets the eligibility criteria as set out in the Keppel REIT’s green financing framework.
This green financing framework was developed in alignment with the four core components of the International Capital Market Association’s (ICMA) green bond principles (GBP) 2021, as well as the green loan principles (GLP) 2023 administered by the Loan Market Association, the Asia Pacific Loan Market Association, and the Loan Syndications and Trading Association, says Keppel REIT’s manager.
According to Keppel REIT’s announcement, the four components relate to the use of proceeds, the process for project evaluation and selection, the management of proceeds, and the reporting process. “Moving forward, the framework will serve as a reference for all green finance transactions issued by Keppel REIT, including bonds, term loans, revolving credit facilities, medium-term notes, convertible bonds, perpetual securities and any other financial instrument publicly or privately placed in various formats, tenure and currency,” the announcement says.
The framework was externally reviewed by Moody’s Investors Service, which assigned a Sustainability Quality Score of SQS2 (very good) to the framework and stated that it “demonstrates a significant contribution to sustainability”.
Koh Wee Lih, CEO of Keppel REIT’s manager, says: “Keppel REIT is steadfast in our commitment to sustainability and is dedicated to integrating ESG factors into our strategy and operations. The framework will guide our investments towards building a future-oriented and resilient portfolio while supporting our long-term sustainability goals.”
255 George Street is mainly an office building with some supportive retail elements. The building is accredited with a 5.5-star Nabers energy rating.
The first-year yield on 255 George Street exceeds 6% and the weighted average lease expiry is 6.8 years. The pro forma distribution per unit (DPU) accretion is 1.4% to 1.5%, excluding Keppel REIT’s anniversary distribution which comprises $100 million over five years to 2026. Keppel REIT announced a DPU of 5.8 cents in FY2023, translating into a yield of 6.8%.
