MANULIFE US REIT
BTOU.SI
Manulife US Real Estate Inv - America’s office is great
- Maiden DPU of 2.01 UScts, 5.8% above IPO forecasts.
- 8.5% rental reversions with prospect of higher rents on favourable demand and supply outlook.
- Additional upside from increased NLA at Figueroa.
Play on exposure to an improving US office market.
- We maintain our BUY call and TP of US$0.93.
- We continue to like Manulife US REIT's (MUST) attractive prospective 7.2% yield, strong organic growth prospects and exposure to the favourable demand and supply fundamentals in the US office markets where MUST’s properties are located. This translates to an 8% DPU growth in FY17, one of the highest among REITs in Singapore.
- The expected strength of the USD/SGD exchange rate could also result in inflows into the stock.
Increased confidence on the REIT’s ability to deliver.
- Our recent visit to properties in the US and meetings with various property brokers as well as MUST’s strong maiden results indicate that market fundamentals remain firm.
- We believe that MUST's properties in Midtown Atlanta and Downtown Los Angeles submarkets will continue to see steadily increasing rents, continued expansionary tenant demand, increased employment opportunities and also a lack of competitive new supply.
- Apart from upside when leases come due, 84.2% of leases (by NLA) have annual rental escalations of around 3%, and 15.0% have provisions for mid-term or period rent increases.
Acquisitions to be the next driver of growth.
- The manager has been disciplined towards acquisitions and with the recent decline in gearing to 34.6%, MUST is well placed to execute on DPU-accretive acquisitions.
- Apart from that, we expect any acquisition to diversify the REIT’s geographic earnings base and tenant concentration. Markets that are of interest are core submarkets that enjoy demand from a diversified type of industries (i.e. manufacturing, financial, technology and law firms) which imply stability across market cycles.
- We have not priced in acquisitions in our forecasts.
Valuation
- TP is maintained at US$0.93 based on DCF. The stock offers attractive FY16-17F yields of 6.6-7.2%.
Key Risks to Our View
- Lower-than-expected rental income. The key risk to our view is lower-than-expected rental income, arising from the non-replacement/renewal of leases and/or slower-than-expected recovery of office rents in the US.
Derek Tan
DBS Vickers
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Mervin Song CFA
DBS Vickers
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http://www.dbsvickers.com/
2016-11-08
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