Manulife US REIT - A “Trump” Card
- We expect US office demand to strengthen further in 2017 from pro- business policies of president-elect Donald Trump.
- Manulife US REIT (MUST) is the only listed REIT in Asia offering the best-proxy to the rebounding US economy and strengthening USD via its freehold office properties.
- The REIT also offers a superior FY17F yield of 7.6%, a healthy 100bps above its Singapore peers. We expect it to acquire at least one office asset in 2017 boosting DPU.
- Maintain BUY with a USD0.96 TP (14% upside).
Trump’s economic policy favours US office demand.
- US president-elect Donald Trump’s economic policies of cutting corporate tax rates, moving offshore jobs back to US and spurring growth through infrastructure and defence spending augurs well for the US labour market and office demand in 2017.
- The US economy is already in a solid footing with revised 3Q GDP up 3.5%, marking the strongest quarter in two years. According to Colliers International (Colliers), the US economy added an average of 206,000 jobs per month in 3Q16, up 41% QoQ.
- Unemployment rate stood at 4.6% in Nov 2016, the lowest since Aug 2007.
Office leasing momentum gaining traction with rentals picking up.
- According to Colliers 3Q16 report, the US office market continued its positive momentum with the national vacancy rate dropping to 12.4% (-10bps QoQ). It is expected to match or dip below prior cycle low by early 2017. 3Q overall net office absorption stood at 20.6m sqf, well above the 5-year quarterly average of 16.6m sqf.
- Vacancy rates also continued to decline in all Manulife US REIT (MUST) portfolio sub-markets of Atlanta, Los Angeles and Orange County in 2016 with annual rents increasing 6.1%,6.5% and 8.5% YoY respectively in 2016, based on JLL data.
A hedge against Fed rate hikes.
- While a faster-than-expected US Federal Reserve rate hike generally has a negative impact on yield instruments like REITs, we believe the impact on MUST is mitigated. This is as such an event would coincide with a pick-up in the US economy and consequently an improvement in office demand.
- The rate hike would also result in the strengthening of USD, benefitting Asian currency investors.
- In addition, the REIT refinanced its loan facility (Jul 2016) to a 4-year fixed-term loan at a lower interest cost of 2.46%, shielding it from impact of rising borrowing costs.
Acquisitions on the horizon.
- We expect MUST to acquire at least one yield accretive office property in 2017 further boosting its DPU. Near-term acquisitions are expected to be bite sized, at USD100-150m targeting secondary cities to provide further portfolio diversification.
- Its sponsor, Manulife Group, has total assets under management (AUM) of USD718bn. Of this, its US office assets account for >USD6bn, providing a strong pipeline.
- Its current gearing remains modest, at 34.7%.
Maintain BUY with a TP of USD0.96.
- Our TP is based on a 5-year DDM model (COE: 8.5%, TG: 2%).
- MUST offers high FY17F-18F dividend yields of 7.6% and 7.8% respectively, a good 100bps above the office S-REITs average.
- Key risks are the ability to retain its key office tenants, changes to the underlying tax-efficient structure, and the US economic growth faltering.