Manulife US Real Estate Inv - DBS Research 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.

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.

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%.

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.

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.

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.

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%).

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 | http://www.dbsvickers.com/ 2017-05-02

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.01 Up 0.950