Manulife US Real Estate Inv - Outperforming IPO estimates
- 4Q16 DPU of 1.54 UScts ahead of expectations and IPO forecasts.
- Double digit rental reversions and uplift in portfolio values points to strong US office market.
- Gearing drops to 33.8%, provides additional debt headroom for acquisitions.
Play on exposure to an improving US office market.
- We maintain our BUY call with a revised TP of US$0.95.
- We continue to like Manulife US REIT's (MUST) attractive prospective 7.2% yield, inbuilt annual rental escalations and exposure to the favourable demand and supply fundamentals in the various US office markets where MUST’s properties are located. This translates to an 8% DPU growth in FY17 (on an annualised basis), one of the highest among REITs in Singapore.
Confidence on the REIT’s ability to deliver.
- MUST’s strong FY16 results and double digit rental reversions indicate that MUST's properties in Midtown Atlanta and Downtown Los Angeles submarkets 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 are due, c.84% of leases (by net lettable area (NLA)) have annual rental escalations of c. 3%.
Acquisitions to be the next growth driver.
- The Manager has a disciplined strategy towards acquisitions and with the recent decline in gearing to 33-34%, MUST is well placed to execute on DPU-accretive acquisitions.
- Apart from that, we expect any acquisitions 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 assumed any acquisitions in our forecasts.
- On the back of the better than expected 4Q16 results, we raised our DCF-based TP to US$0.95 from US$0.93.
- The stock offers attractive FY17-18F yields of 7.2-7.3%.
Key Risks to Our View
- Lower-than-expected rental income. The key risk to our view is lower-than-expected rental income, arising from non-replacement/renewal of leases and/or slower-than-expected recovery of office rents in the US.