Hey there, fellow investors! Welcome back to ‘The Dividend Uncle’! In today’s post, we’re looking at an exciting opportunity on the horizon for REIT investors. This could finally mark a turnaround in the REIT market, which has suffered nearly a 15% decline in the S-REIT index this year. For a glimpse of the potential rebound, consider that the S-REIT index jumped by 2.6% on July 11th, following news of lower inflation.

Before we dive into today’s video, I want to take a moment to express my gratitude. Over the past two years, ‘The Dividend Uncle’ has been working tirelessly to bring you well-researched content and personal insights into my portfolio. It’s been a pleasure sharing this journey with you, especially as we stand on the brink of a tremendous opportunity for REIT investors. Thank you all for your unwavering support and engagement!

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Alright, let’s jump right in.

Let the Good Times Begin

Let’s start with some positive news from the latest testimony by US Federal Reserve chair Jay Powell, to the US Congress. He said that the US is no longer an overheated economy. The fight against inflation seems to be making headway, with inflation figures trending downwards. The market is buzzing with expectations of the first interest rate cut in September – just two months away. There’s even chatter about another rate cut by the end of the year. The last time we saw such high rate cut expectations, back in Q4 of 2023, REIT prices skyrocketed by close to 20% over 3 months.

If inflation continues to drop, the US Fed will likely cut interest rates, following the lead of the EU, UK, and Canada, which have already started lowering rates. Lower than expected inflation in June to 3%, just announced on July 11th could be the start of the good times.

This could mean a very profitable second half of 2024 for those who’ve stuck with REITs through thick and thin. From now till September, we have a two-month window to position ourselves for the upswing and secure the current high dividend yields.

The Dividend Uncle’s Take: Strategy for the Narrow Window

Those who have been watching my videos would know that throughout this period of extreme volatility, I’ve been steadily buying quality REITs to build up my portfolio. So I completely understand the frustrations many of you are feeling as the REITs market continues to decline. Some investors are saying they’re running out of resources – believe me, I’m in the same boat.

But in the next two months, I’m planning to accelerate my investments by tapping into my MariBank accounts, where I’ve stashed my dry powder. Having already built up my core REIT holdings for the eventual upturn, I’m now focusing on REITs that have underperformed the market, are poised to benefit quickly from rate cuts, and whose business fundamentals remain solid.

Revealing the Top 3 Beneficiaries and 1 Wild Card

I’ve been closely monitoring the market to identify opportunities that could benefit the most from these anticipated changes. Here are the three REITs that I believe meet these criteria.

1) CDL Hospitality Trust

This REIT holds 20 hospitality properties across several countries, with a total valuation of $3.3 billion. Many investors have been discounting this REIT mainly because of its management’s explicit decision not to hedge too much of its debt, specifically, about 51% of its debt is fixed. This results in greater increases in the interest expenses over the quarters, affecting its dividends. Its share price has declined 12.6% so far this year, underperforming the index slightly.

As it has 30.1% of its debt up for renewal by the end of the year, the interest rate declines will come at the right time, and it will stand to benefit. Additionally, its construction project, The Castings, in Manchester, UK is opening around this period, and will start generating income, boosting its distribution.

2) CapitaLand Ascendas REIT

This might be a surprising pick for some people. Although CapitaLand Ascendas REIT has fixed 82.6% of its debt, it has a substantial amount of debt up for renewal in the next 1 to 2 years – about $2 billion, or 27% of its total debt. This is an opportunity for the REIT to reduce its interest expenses as the timing will coincide with declining interest rates, allowing the REIT to benefit as it renews its debt.

Despite its operational strength, with portfolio average rental reversion at an impressive 16%, the market has not been kind. Its price to net asset value ratio, a measure of valuation of a REIT, is currently trading near multi-year lows, reflecting potential opportunity for investors.

3) Far East Hospitality Trust

Like CDL Hospitality Trust, Far East Hospitality Trust has hedged less than half of its debt, at 42.5%. This means that even though it has little debt up for renewal in 2024, it will benefit from lower interest rates directly through the floating-rate loans. Yet, its Singapore-based assets are outperforming, driven by Singapore’s tourism sector. For 2H 2023, its Net Property Income soared 24.8%, while its distributable income jumped 32.4%.

Despite this, its share price has remained flat year-to-date, even though its DPU has increased by 25.4% in 2H 2023. With many properties now earning higher than base rent, both earnings and dividends are expected to rise as interest expenses fall.

Wild Card Pick: Keppel Pacific Oak US REIT

Now, this is the most controversial pick, and many viewers might disagree. If you’re fed up with Keppel Pacific Oak US REIT for halting its distributions, feel free to skip ahead. But hear me out.

In my previous video, I voiced my dissatisfaction with Keppel Pacific Oak US REIT’s management for unexpectedly halting dividends, causing distress among many investors. This has led to the share price dropping 63% year-to-date. However, as we now stand on the cusp of potential interest rate cuts, I believe Keppel Pacific Oak US REIT is poised for significant benefits.

Firstly, the main reason for halting distributions was the concern of the gearing ratio exceeding 45%, currently at 43%. A reduction in interest rates will lower the discount rates applied to valuations at year-end, thereby boosting valuations and lowering the gearing ratio.

Secondly, rising interest expenses have led to substantial drops in distribution despite stable property operations. In 2023, net property income increased by 2.2%, but income available for distribution fell by 13.8% due to the spike in interest expenses. Conversely, a decrease in interest rate will result in a decline in interest expense and lead to higher dividends. Management has reported that for every 0.5% increase in interest rates, net property income drops by $0.9 million. Hence, if interest rates drop by 0.5% by year-end, net property income could increase by $0.9 million.

Thirdly, a major concern for investors has been the performance of the properties themselves. The rental reversion was slightly negative at 1.4% in Q1 2024, much better than the nearly 10% negative reversion for Manulife US REIT. Given the stable performance of its properties, lower interest expenses could expedite the recapitalization of the REIT, using suspended dividends to pay down debt.

Keppel Pacific Oak US REIT could possibly outperform other REITs due to lower interest rates from an earlier restart of dividend distribution, and higher dividend payout when they resume. Word of caution. This is a wild card pick, with substantial risks, so make sure to do your own research.

That wraps up today’s post. Remember, we have a short window to position ourselves for the potential upswing in REIT prices before interest rates are cut. Even before then, market expectations may already push up REIT prices.

As always, diversification is key. Stay informed, stay patient, and happy investing!