MANULIFE US REIT
BTOU.SI
Manulife US REIT - Wait no longer
- Site visit to properties and meetings with property brokers give us increased confidence on REIT’s ability to beat forecasts.
- Portfolio located in key submarkets that enjoy strong operational dynamics.
- Acquisitions to further diversify geographic and tenant exposures.
Play on exposure to the US property market which is in the early stages of recovery.
- We maintain our BUY call and TP of S$0.93.
- We continue to like Manulife US REIT's (MUST) strong organic growth prospects (CAGR of 5% over FY16-17F) which is one of the highest among REITs in Singapore. The expected strength of the USD/SGD exchange rate could potentially result in inflows into the stock.
Increased confidence on the REIT’s ability to beat forecasts post site visit.
- Our recent visit to properties in the US and meetings with various property brokers 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, 80.2% of leases (by NLA) have annual rental escalations of between 2.5-3.5%, and 18.9% have provisions for mid-term or period rent increases.
- The REIT is expected to deliver consistent stable growth.
Acquisitions to be the next driver of growth.
- The manager has been disciplined towards acquisitions and we believe that any executed acquisitions will be accretive to distributions.
- 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 an attractive FY16-17F 6.8-7.4% yield.
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 nonreplacement/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/
2016-10-10
DBS Vickers
SGX Stock
Analyst Report
0.93
Up
0.930
