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US-Based REITs: Which Is the Most Attractive Investment?

When the REIT market was first launched in 2002, most of the early REITs held local properties within their portfolios. This was understandable as Singapore back then was still a new and nascent market for REITs, and many market watchers were observing how the REIT industry would pan out.

Over the next 17 years, a wide variety of REITs have come to market, some of which are holding purely overseas assets. Investors can now gain access to properties in many different countries such as Europe, Australia, China, and the US through different REITs.

With the recent IPOs of both ARA US Hospitality Trust (SGX: XZL) and Eagle Hospitality Trust (SGX: LIW), I decided to do a quick study to determine which is the most attractive REIT through which investors can gain exposure to the US. I also included the two REITs with US exposure, namely Manulife US REIT (SGX: BTOU) and Keppel-KBS US REIT (SGX: CMOU) in the study. I am leaving Prime US REIT out for now as it was just recently listed.

Property type

I first looked at the type of properties held by each REIT. Manulife and Keppel-KBS owned commercial properties, where the tenants are usually corporations and small businesses. ARA and Eagle’s portfolios consist of hotels, which are usually occupied by individuals. Office properties usually sign on fairly long-term leases (around 1-2 years) with their tenants, while hotel guests usually stay for 1-7 days on average.

This makes commercial REITs more stable and predictable than hospitality REITs thanks to longer leases and also the type of customer (corporations versus individuals).

Number of properties and occupancy rates

Next, I looked at the number of properties and occupancy rates for each REIT. ARA has the most number of properties at 38 hotels, which implies there is very little concentration risk for revenue. On the other hand, Manulife owns eight trophy and Class A properties; therefore, there is a fair amount of concentration risk within the REIT. Keppel-KBS and Eagle are in the middle with 13 and 18 properties, respectively, and are adequately diversified.

Occupancy rates also tend to be higher for commercial REITs compared to hospitality REITs. This provides more assurance for unitholders that commercial properties can generate more stable income even during a downturn.

Dividend yield

Finally, I looked at the prospective dividend yields of the four REITs. Eagle seems to be the most attractive of all with a prospective yield of 8.9%, a result of its share price tumbling to US$0.72 from its IPO price of US$0.78. Keppel-KBS REIT has a fairly high yield of 7.4%, which is higher than Manulife’s yield, even though they are both commercial REITs.

The Foolish conclusion

Taking all of these factors into consideration, Keppel-KBS REIT seems to be the most attractive option. First off, it is a commercial REIT with stable, long-term tenants, has a high occupancy rate for its properties, is adequately diversified, has a strong sponsor in Keppel Corporation Limited (SGX: BN4), and has a higher dividend yield than Manulife.

While Eagle may have the highest dividend yield of the four, investors should be aware of the risks associated with that type of REIT.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of Manulife US REIT.