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This is the transcript of a YouTube video I produced recently.
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During "Evening with AK and friends 2023", someone came up to me and asked what I thought of US Hospitality REITs listed in Singapore.
He asked that question since I kept reminding myself to stay away from US commercial real estate REITs, and in particular the US office REITs.
Of course, now we know what just happened to Digital Core real estate investment trust, a data center Trust listed in Singapore.
They lost their second largest customer which contributed 23% to their total rental income.
That customer was also Mapletree Industrial Trust's third largest customer.
So, Mapletree Industrial Trust would be taking a hit too although not as badly as in the case of Digital Core real estate investment trust.
Mapletree Industrial Trust announced that their 3rd largest tenant by gross rental income has initiated bankruptcy proceedings in the US Court.
The data center tenant is a global co-location provider and accounted for 3.2% of Mapletree Industrial Trust's gross rental income.
Quick to follow, we saw Manulife US REIT's fifth-largest tenant by gross rental income exercised an early termination of its lease.
This was for 500 Plaza Drive, also known as Plaza, in New Jersey USA.
Wait, there is more.
This is in the news today.
This is in the news today.
Park Hotels and Resorts, a real estate investment trust in the USA, has made the "difficult, but necessary" decision to stop payments on its $725 million commercial mortgage-backed security loan secured by two of its San Francisco hotels.
They are Hilton San Francisco Union Square and the Parc 55 San Francisco.
They are giving up on these hotels and would see them removed forcibly from their portfolio of hotels.
The problem has partly to do with overly optimistic valuations during the years of ultra-low interest rates.
The two downtown San Francisco hotels were valued at a combined $1.56 billion in an appraisal at the time of the loan underwriting in 2016!
This means the current Loan to Value, if the valuation is still valid, is around 46%.
Think of it as a gearing level of 46% for a REIT.
That does not sound excessive, but it seems like it is. ;p
It is very likely that the valuations of those two hotels could have seen a decline, which would bump up the Loan to Value number, of course.
It is very likely that the valuations of those two hotels could have seen a decline, which would bump up the Loan to Value number, of course.
We would not be wrong to question if the valuations of assets held by ARA US Hospitality Trust are still realistic today, compared to what they were pre-pandemic.
Of course, this is but one question to ask.
ARA US Hospitality Trust has seen its gearing ratio increased and is relatively high at about 41%.
This is even as its proportion of debt which have fixed interest rates declined significantly from 82% to 73%.
With weighted average debt maturity at only 1.3 years, the Trust is going to face the challenge of refinancing in an environment of not only higher interest rates, but also tighter credit conditions.
Why is this important to note?
Well, the question sometimes is not how much the loan would cost, but whether we could even get a loan?
Shoes are dropping.
Shoes are dropping.
More shoes are going to drop.
And it feels like it is raining shoes in the US commercial real estate sector.
Now, apparently, the next shoe to drop could be US Hospitality REITs.
To be sure, I am not talking about excessive financial engineering or possible fraud here, which seemed to be the case for Eagle Hospitality Trust, another US hospitality Trust which was listed in Singapore.
I am talking about something which affects the entire commercial real estate sector in the USA.
Credit is tightening in the USA and more so for commercial real estate.
In a recent interview with CNBC, a commercial real estate developer in the USA said he sent out 48 enquiries recently, and he received quotes from only two banks.
He said that was highly unusual, and he followed by saying it seemed that the commercial real estate sector in the USA was being strangled.
That interview gave an idea of how bad the credit situation for commercial real estate is in the USA now, and it could get worse for the whole sector.
During "Evening with AK and friends 2023", I reminded myself that I was painting the entire US commercial real estate sector with a broad brush.
During "Evening with AK and friends 2023", I reminded myself that I was painting the entire US commercial real estate sector with a broad brush.
I don't know enough to be able to invest comfortably in those REITs.
Those who have enough knowledge and savvy to invest well in the sector should follow their own plan.
Always have a plan, our own plan.
If AK can talk to himself, so can you!
References:
1. Digital Core REIT.
2. Manulife US REIT.
References:
1. Digital Core REIT.
2. Manulife US REIT.
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2 comments:
Hi AK,
Looks like IREIT is offering its shares right now at potential PO price :)
Hi keng,
Eh, to be sure, I don't know what IREIT's final rights issue price is going to be.
However, Mr. Market is selling down IREIT which makes it look more attractive to me. ;p
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