Manulife US REIT - RHB Invest 2017-12-19: A Pure-Play On US Office Recovery

MANULIFE US REIT BTOU.SI

Manulife US REIT - A Pure-Play On US Office Recovery

Manulife US REIT, through its portfolio of five freehold office properties in US, offers a good proxy to the strengthening US economy and office demand.
DPU growth for 2018 would be driven by contributions from recent acquisitions and positive rent growth. We expect rent reversions to stay positive in mid-single digits. The impending US Fed rate hikes should also have minimal impact to its portfolio as all its debt are on fixed-terms.
With Manulife US REIT offering a FY18F yield of 6.6%, > 100bps higher than office S-REITs average, we believe there is more room for yield compression.

The US labour market has been steadily gathering momentum with October’s unemployment rate at 4.1% – the lowest level in 17 years. Annualised 3Q GDP growth (revised estimates) came in better than expected at 3.3% higher than 2Q’s 3.1%. According to Jones Lang LaSalle report (3Q), overall Class A rent growth slowed 120bps but remained positive at 2.5% YoY.
Additionally, a favourable tax reform could further boost corporate sentiments and increase office demand.
On the supply front, we note that the market supply across its portfolio locations remains limited. Thus, the overall office market dynamics remain positive for 2018.

About 1.6% and 2.5% of its leases (as a percentage of cash rental income) are due for renewal in 2018-2019. Average rents across its office properties are still 5-10% below current passing rents.
We expect rent reversions to stay positive in the mid-single digit levels for next year. YTD (9M17) rent reversions remains healthy at +12.2% YoY. Key to note that rent reversions are in addition to in-built rent escalations of (~2-3% pa).

While a rate hike generally has a negative impact on yield instruments like REITs, we believe the impact on Manulife US REIT may be mitigated, as it signals a pick-up in the US economy and office demand.
On debt, 100% of its loans are on fixed-terms with no loans due for renewal until Jul 2019.

The acquisition of 500 Plaza Drive (Plaza) in New Jersey was completed in July with maiden contributions recorded in 3Q. The property has high occupancy of 98.9% and a long weighted average lease to expiry (WALE) of 8.6 years and was acquired at healthy NPI yield (>7%).
More recently (1 Nov 2017), Manulife US REIT completed the acquisition of 10 Exchange Place (97% occupancy, WALE: 5.8 years) in Jersey City. These two acquisitions in quick succession have demonstrated management’s ability to deliver inorganic growth despite the competitive landscape and cap rate compression. Post acquisitions, gearing still remains modest at 33.1% providing a debt headroom of about USD125m for acquisitions (assuming 40% as comfortable gearing).

Manulife US REIT remains one of our Preferred Picks among mid-cap REITs. The REIT offers healthy FY18F-19F yields of 6.6% and 6.8% respectively. Our forecasts assume a 100% payout ratio.
Our DDM-derived USD0.98 TP is based on CoE of 8% and TG of 2%.
Key risks are the ability to retain key tenants and changes to its efficient underlying tax structure.

Manulife US REIT is one of the 2018 Top Stock Picks by RHB Invest.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19

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