Manulife US Real Estate Inv - DBS Research 2017-01-04: America’s office is great

Manulife US Real Estate Inv - DBS Vickers 2017-01-04: America’s office is great MANULIFE US REIT BTOU.SI

Manulife US Real Estate Inv - America’s office is great

Play on exposure to an improving US office market. 

  • We maintain our BUY call and TP of US$0.93. 
  • We continue to like Manulife US REIT's (MUST) attractive prospective 7.3% yield, strong organic growth prospects and exposure to the favourable demand and supply fundamentals in the US office markets where MUST’s properties are located. This translates to an 8% DPU growth in FY17, one of the highest among REITs in Singapore. 
  • The expected strength of the USD/SGD exchange rate could also result in inflows into the stock.

Increased confidence on the REIT’s ability to deliver. 

  • Our recent visit to properties in the US and meetings with various property brokers as well as MUST’s strong maiden results 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, 84.2% of leases (by NLA) have annual rental escalations of around 3%, and 15.0% have provisions for mid-term or period rent increases.

Acquisitions to be the next driver of growth. 

  • The manager has been disciplined towards acquisitions and with the recent decline in gearing to 34.6%, MUST is well placed to execute on DPU-accretive acquisitions. 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.


  • TP is maintained at US$0.93 based on DCF. 
  • The stock offers attractive FY16-17F yields of 6.8-7.3%.   

Key Risks to Our View

  • Lower-than-expected rental income. The key risk to our view is lower-than-expected rental income, arising from the non0replacement/renewal of leases and/or slower-than-expected recovery of office rents in the US.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | 2017-01-04
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.930 Same 0.930