MANULIFE US REIT
BTOU.SI
Manulife US REIT - US Office Dynamics Remain Favourable
- Manulife US REIT's 3Q results were in line. DPU growth ahead would be driven by contributions from the recent acquisitions and positive rent growth.
- Rent reversions are expected to stay firm as portfolio rents are still below current market rents.
- The upcoming listing of Keppel-KBS US REIT should raise investor awareness and help Asian investors better understand US office market fundamentals.
- With Manulife US REIT offering FY18F yields of 6.7%, > 100bps higher than office S-REITs’ average, we believe there is room for further yield compression.
- Maintain BUY with an unchanged USD0.98 TP (8% upside).
Robust job data underpinning US office demand.
- The US labour market has been steadily gathering momentum with October’s unemployment rate at 4.1%, the lowest level in 17 years. Annualised 3Q GDP growth came in better-than- expected at 3% (Reuters estimate: 2.5%). According to Jones Lang LaSalle’s report (3Q), overall Class A rent growth slowed 120bps but remained positive at 2.5% YoY.
- On the supply front, we note that the micro-market supply across its portfolio locations remains limited. Thus, the overall office market dynamics remain positive in the near-term.
Room for rent growth ahead.
- Average rents across its office properties are still 5-10% below the current passing rents. Thus, we expect rent reversions to stay positive in the mid-single digit level for next year.
- YTD (9M17), rent reversions remains healthy at +12.2% YoY. Key to note is that rent reversions are in addition to the inbuilt rent escalations of ~2-3% pa.
- Average property rent (3Q) for Michelson fell by 3% due to the lease commencement of a tenant that had been forward renewed in 2015 at a lower rent.
Growing its portfolio with two quality acquisitions.
- The acquisition of 500 Plaza Drive (Plaza) in New Jersey was completed in July with maiden contributions recorded in 3Q. The property, with a high occupancy of 98.9% and long weighted average lease to expiry (WALE) of 8.6 years, was acquired at a healthy NPI yield ( > 7%).
- More recently (1 Nov), Manulife US REIT (MUST) completed the acquisition of 10 Exchange Place (97% occupancy, WALE: 5.8 years) in Jersey City.
- The two acquisitions in quick succession have demonstrated management’s ability to deliver inorganic growth despite the competitive landscape and cap rate compression.
Listing of KKUR to raise investor awareness.
- Following the footsteps of Manulife US REIT (MUST), Keppel-KBS US REIT(KKUR) would be listing a portfolio of 11 office assets across seven major cities. The REIT is expected to commence trading on 9 Nov). We view the listing favourably as it would help Asian investors gain a better understanding of the US office market and broaden investor base.
- We note KKUR offers FY18F indicative yields (based on its IPO prospectus) of 6.8%, slightly higher than MUST, but we believe MUST’s Class A assets and good location attributes deserve a premium.
Maintain BUY.
- Manulife US REIT remains one of our Preferred Picks among mid-cap REITs. We have adjusted our DPU figures to fully reflect the effects of a rights issue. Our forecasts assume a 100% payout ratio.
- Our DDM-derived SGD0.98 TP is based on a CoE: 8% and TG: 2%.
- Key risks are the ability to retain key tenants and changes to its efficient underlying tax structure.
Vijay Natarajan
RHB Invest
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http://www.rhbinvest.com.sg/
2017-11-06
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