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

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).

Maiden acquisition demonstrates ability and market potential. 

  • 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.

Yield-accretive deal. 

  • 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.

Healthy portfolio diversification. 

  • 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%.

Placement to raise USD80.5m. 

  • 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.

Our Top Pick among mid-cap REITs; Target Price rises to USD0.99. 

  • 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 | 2017-06-21
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.99 Up 0.960