Manulife US REIT - RHB Invest 2017-06-21: A Jewel In The Crown

MANULIFE US REIT BTOU.SI

Manulife US REIT - A Jewel In The Crown

Manulife US REIT (MUST) announced its maiden acquisition of a prime Class-A freehold office asset, Plaza, located in New Jersey. We like the deal as:
1. It is yield-accretive with an estimated NPI yield of ~7.5%;
2. 2Plaza has a high occupancy rate (98.9%) and a WALE of 9.2 years;
3. Plaza also has an excellent location and property attributes; as well as
4. A diversified tenant base and a geographical presence.

The REIT offers high yields of > 7%, which we deem as highly attractive. Maintain BUY, with a TP of USD0.99 (from USD0.96, 10% upside).

Manulife US REIT (MUST) announced its proposed acquisition of Plaza, located at 500 Plaza Drive, Secaucus, New Jersey, for USD115m.
Plaza is a Class-A freehold office building with excellent connectivity. It is only about three miles from Manhattan New York. The property, completed in 1985, underwent a renovation in 2015-2016 at a cost of > USD16m and enjoys a high occupancy rate (98.9%).
We understand that the seller is an unrelated party comprising large institutional and value-add funds. The transaction is expected to be completed by August.

The purchase price is at a 1% discount to the latest independent valuation of USD116m.
Our calculations indicate the acquisition’s NPI yield translates to an attractive ~7.5%. Management noted that almost all the leases have in-built rental escalations of ~1.5% pa. The transaction is yield-accretive with a 2.3% increase in pro-forma FY16 DPU (assuming a debt-equity mix of 35%/65% and a borrowing cost of 3.75%).
Post completion, Plaza would account for 12% of its enlarged portfolio value and ~15% of FY16 NPI.

Besides geographical diversification to the northern New Jersey office market, Plaza also offers good tenant diversification. Management highlighted that the Meadowlands submarket has been emerging as a cost-efficient alternative, with current office rentals (~USD25-30psf pa) at steep 50-60% discounts to the Manhattan office submarket.
In terms of tenant mix, retail trade (44.5% of NLA), medical diagnostics centres (28.9%) and financial institutions (22.1%) are the biggest trade sectors.
Post-acquisition, MUST’s overall exposure to law firms will decline to 36.6%, from 43.8%.

Along with the acquisition, MUST completed a private placement of 97m units at an issue price of 83 US cents (6.9% discount to VWAP), raising gross proceeds of USD80.5m.
Proceeds would mainly be used to fund acquisitions. New units will be traded from 29 Jun onwards.

We have revised our FY17F-19F earnings by 1-3%, imputing the acquisition and placement of new units in our estimates.
Our DDM-based (COE: 8.5%, TG: 2%) Target Price correspondingly increases by +3%.
MUST is our Top Pick of the mid-cap REITs for its high yield offering, organic rental growth and exposure to the rebounding US economy and office market.
Key risks are ability to retain key tenants, changes in underlying tax structure and the US economic growth faltering.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-06-21

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.99 Up 0.960