Manulife US REIT - RHB Invest 2017-05-03: A Solid Performance

Manulife US REIT - RHB Invest 2017-05-03: A Solid Performance MANULIFE US REIT BTOU.SI

Manulife US REIT - A Solid Performance

  • MUST reported strong 1Q17 results with DPU exceeding its IPO forecasts by 8.6%. The higher DPU was backed by a higher occupancy, rental increase from rent-review and lower interest costs. 
  • We expect MUST to continue benefitting from the strong underlying fundaments in the US office market with its strategically located three freehold US office properties. 
  • MUST offers superior FY17F-18F dividend yields of 7.5% and 7.6% respectively, a good 100-150bps above the office S-REITs average. 
  • Maintain BUY, with a USD0.96 TP.

Improvement seen in all quarters. 

  • Portfolio occupancy increased by 0.2ppt QoQ to 97.2% with an increase in passing rents (weighted average) of +3% in 1Q17. Hotel Figueroa, in downtown Los Angeles, was the key growth driver with higher occupancy (98%,+0.5ppt QoQ) and higher rents. 
  • Key to note is that about 86% of Manulife US REIT (MUST) portfolio has organic rental escalations of c.3% p.a. with another 13% subject to mid-term or periodic rental increase. 
  • Looking ahead, MUST has about 4.8% of leases (as % of cash rental income) due for renewal this year. We expect rent reversions to remain positive in mid- single digits on the back of improving office demand and limited supply.

Office fundamentals in the US remain strong. 

  • Based on a CoStar Portfolio Strategy 1Q17 report (CoStar), overall the US office market saw a positive net absorption of 10.8m sq ft in 1Q17 with national vacancy rates remaining unchanged at 9.7%.  Key sectors driving office demand are Technology, Advertising, and Media. 
  • In terms of MUST portfolio sub-markets Midtown Atlanta, Greater Downtown LA and Irvine, Orange County enjoyed 12-month rent growth of 5.3%, 7.7% and 7.6% YoY respectively, based on CoStar.

Acquisition could further boost DPU growth. 

  • Near-term acquisitions are expected to be around USD100-150m, likely targeting key secondary cities to provide portfolio diversification. 
  • Gearing remains comfortable at 34.2% providing funding flexibility. 
  • Its sponsor, Manulife group, has a US office portfolio assets of > USD6bn, providing a strong pipeline in addition to third party assets. We expect MUST to acquire at least one yield accretive office property in 2017 further boosting its DPU.

US Fed rate hikes to have a minimal impact. 

  • We don’t expect a significant impact to MUST from market expectations of two more rate hikes this year; such an event would coincide with a stronger US economy resulting in higher office demand and would also result in a stronger USD, benefitting Asian currency investors. 
  • With 100% of its borrowings fixed until Jul 2019 there is also no impact on its finance costs from rate hikes in the near-term.

Offers attractive FY17 yield of 7.5%, BUY with TP of USD0.96. 

  • Our TP is based on a 5-Year DDM model (COE: 8.5%, TG: 2%). 
  • Key drivers are positive rent reversions, accretive acquisitions, a strong US economy and USD. 
  • Key risks are ability to retain its key office tenants, changes to the underlying tax- efficient structure and the US economic growth faltering.

Vijay Natarajan RHB Invest | 2017-05-03
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.960 Same 0.960