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Author: simonsg   |   Latest post: Fri, 13 Sep 2019, 5:12 PM

 

Manulife US REIT - Proving Its Mettle; Remains a Top Pick

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  • MANULIFE US REIT (SGX:BTOU) is still one of our Top Picks for REITs. 4Q18 results were in-line.
  • Manulife US REIT remains one of the prime beneficiaries of strong US economic fundamentals, from its exposure to good quality office assets across gateway cities. We expect a 3-year CAGR DPU of 3% on the back of its organic rent growth and contributions from newly acquired assets.
  • Valuations are still attractive with the stock trading at 1x P/BV and offering a 7% yield. We have fine-tuned lower our COE assumptions, to 8.3% (from 8.4%) in our DDM, to better reflect a slightly subdued interest rate outlook.
  • Keep BUY with a higher Target Price of USD0.94, from USD0.92, 10% upside with 7% yield.

Renewed Hyundai Lease for 11 More Years

  • Hyundai Capital America (Hyundai) is the fourth largest tenant in its portfolio (c.4.6% of FY18 rental income), occupying 20% of Michelson. The current lease was set to expire in 4Q19 and there were some investor concerns on this lease renewal due to ongoing trade tensions and competitive supply. Manulife US REIT quelled these concerns announcing an 11-years lease extension, which stands as a testament to its asset quality and pro-active management style.
  • While rent figures were not disclosed due to confidentiality, we estimate the signing rent to be flattish to slightly lower vs the existing one as Michelson is the only asset in its portfolio which is at a slight premium to market rents.
  • We believe the long lease more than adequately compensate the rental trade-off.

Portfolio Metrics to Remain Strong in 2019

  • Excluding the Hyundai lease, only 5.5% of leases are pending renewals in 2019, for which we expect positive rent reversions of 3-5%. Except for Michelson, most of its assets are currently under-rented ie at 5%-10% below market rents. Just a note that rent reversions are on top of rent escalations which are at 2-3% pa thus providing a good organic growth.
  • Overall occupancy rose 0.2ppt to 96.7% and we expect it to remain around this level on a limited micro-market supply with office demand strong, on the back of strong jobs creation in the US.

Removal of Tax Overhang Provides Room for Further Upside

  • In Dec 2018, Manulife US REIT announced that based on the proposed 267A regulations, no changes to its tax structure are expected.
  • In addition, Manulife US REIT will also explore the possibility of reverting to its IPO tax structure (which will remove the need for a Barbados entity) once final regulations are announced by mid-2019. This could potentially help in an additional 1.5% tax savings. Our forecast currently does not factor in this potential upside.

Results and Operations Review

4Q18 adjusted DPU up 1.3% y-o-y, results in line.

  • Revenue and NPI were 38.4% higher mainly from acquisition contributions and rental growth at its IPO properties. Finance costs rose 83% due to higher borrowings to fund acquisitions.
  • Adjusted DPU (normalising for rights and preferential offering) rose 3.6% y-o-y to USD0.0605 and came in-line with our and market expectations.

Interest costs to inch-up slightly higher in FY19.

  • Manulife US REIT has a loan amount of USD110m (16% of total) due for refinancing in Apr 2019 for which it is currently in advanced negotiations with several banks. Interest cost has come down from the start of the year on the back of a more dovish outlook by the Fed but it is still expected to be significantly higher at 4% (vs 2.4% pa at the time of IPO). As such, we have factored in a 20bps increase in overall interest cost for FY19.

Portfolio valuation up 2.3% y-o-y

  • Portfolio valuation up 2.3% y-o-y to USD 1.7bn, largely due to the increase in underlying rental income and occupancy improvements.
  • Cap rates for its properties remained relatively stable in the range of 4.5% - 6.8%.

Source: RHB Invest Research - 12 Feb 2019

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