Manulife US Real Estate Inv - DBS Research 2017-05-02: US Office Exposure A Winner

Manulife US Real Estate Inv - DBS Vickers 2017-05-02: US office exposure a winner MANULIFE US REIT BTOU.SI

Manulife US Real Estate Inv - US office exposure a winner

  • 1Q17 DPU of 1.65 UScts above expectations.
  • Stronger-than-expected rents at Figueroa.
  • Positive rental reversions ahead on the back of the upturn in the US office market.

Play on an improving US office market. 

  • We maintain our BUY call with a revised TP of US$1.01. We continue to like Manulife US REIT's (MUST) attractive prospective 7.6% yield, in-built 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 12% DPU growth in FY17 (on an annualised basis), one of the highest among REITs in Singapore.

Robust uplift in passing rent

  • MUST had a strong start to the year with 1Q17 DPU coming in at 1.65 UScts which was 8.6% above IPO forecasts. This was largely due to lower interest costs and better NPI margins.
  • In addition, the results were above our expectations, representing c.27% of our FY17F DPU.
  • The outperformance compared to our forecasts was due to higher-than-expected passing rents at Figueroa which rose 5% q-o-q to US$38.63 psf per year, as the property benefitted from recent rental escalation.
  • MUST’s other properties also had a decent quarter. Average property gross rents for Michelson and Peachtree rose 1.9% and 1.7% q-o-q to US$50.20 and US$31.53 respectively.
  • Overall portfolio occupancy was stable at 97.2%.

Positive rental reversions expected for remainder of FY17

  • MUST did not disclose any rental reversions for 1Q17 due to the small area that was renewed (0.4% of overall NLA) over the quarter. Nevertheless, we expect positive rental reversions to be achieved for 4.8% (by NLA) of the remaining leases that are up for renewal in FY17.
  • The positive momentum is underpinned by the upturn in MUST’s key markets of Downtown LA, Irvine Orange County and Midtown Atlanta, which recorded 7.6%, 7.7% and 5.3% y-o-y increases in spot rents over the quarter respectively. 
  • Vacancy rates of between 10-12% in the US context also indicate that it is a landlords' market, with less pressure on incentives.

Marginal uptick in gearing

  • Gearing rose marginally to 34.2% from 33.8%, largely due to the payment of full-year distributions.
  • Meanwhile, average costs of debt remains stable at 2.46% with 100% of debt fixed.
  • MUST faces no refinancing until July 2019.
  • NAV per unit stands at US$0.85, or US$0.83 excluding distributable income.

Incorporating higher rents – raise FY17-19F DPU by 3-4%

  • After incorporating the higher-than-expected passing rents at Figueroa, we raised our FY17-19F DPU by 3- 4%
  • This in turn also results in our DCF-based TP increasing from S$0.95 to S$1.01. Our TP implies a P/B of 1.19x.
  • We believe MUST will be able to trade above its book value given upside risks to its property value (property values have since risen 7% since its IPO) and as investors anticipate the continued upturn in the US office market.

Maintain BUY

  • We maintain our BUY call with a revised TP of S$1.01.
  • We continue to like MUST for its attractive yield (in excess of 7%), exposure to the upturn in the US office market, and inbuilt organic growth (c.86% of leases have annual rental escalations of around 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.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | 2017-05-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.01 Up 0.950