Manulife US REIT - Riding The “Trumponomics”
- Manulife US REIT (MUST) reported a strong set of maiden FY16 results with DPU exceeding its IPO forecasts by 5%.
- Among S-REITs, MUST offers the best proxy to the strengthening US economy via its three quality freehold office properties. The US office market is gaining traction with strong jobs data and the new president’s pro-business policy stance likely to provide further impetus.
- With the REIT offering superior FY17F yields of 7.3%, above S-REITs average of 6.4%, we believe there is room for further yield compression.
- Maintain BUY and a TP of USD0.96 (12% upside).
US office market gaining momentum.
- Manulife US REIT’s (MUST) office properties achieved strong rent reversions of +10.5% for FY16 on the back of higher demand and favourable market dynamics.
- For 2017, about 5.5% of portfolio (as % of NLA) is up for renewal and we expect rent reversions to be in the mid-single digits.
- Figueroa was the best performing asset in 2016 with double digit rent reversions (+11.6%) for ~99,000 sqf of lease renewals (14% of total GFA). The strong reversions came on the back of more companies moving to Downtown LA to capitalise on the growing millennial population.
Watch out for acquisitions.
- Management has been actively looking for acquisitions and has placed bids for few assets. The acquisitions are expected to be bite sized at USD100-150m likely targeting secondary cities to provide diversification.
- Gearing has come down to 33.8% providing more flexibility.
- Its sponsor, Manulife Group, has a US office portfolio assets of > USD6bn, providing a strong pipeline in addition to third party assets.
Muted impact from Federal Reserve (Fed) rate hikes.
- While the expectation of Fed rate hikes remains an overhang on REITs, the impact on MUST is minimal in our view. Key reasons being that such an event would coincide with a stronger US economy, resulting in higher office demand. It would also result in a stronger USD, benefitting Asian currency investors.
- With 100% of its borrowings fixed until Jul 2019, there is no impact to its finance costs from Fed rate hikes in the near-term.
Maintain BUY with unchanged 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 7.3% and 7.5% respectively, a good 100bps above the office S-REITs average and 400bps above 10-year treasury yields.
- Key risks are the ability to retain its key office tenants, changes to the underlying tax-efficient structure, and the US economic growth faltering.