Manulife US REIT - RHB Invest 2018-05-02: Another Steady Quarter

Manulife US REIT - RHB Invest 2018-05-02: Another Steady Quarter MANULIFE US REIT SGX: BTOU

Manulife US REIT - Another Steady Quarter

  • Manulife US REIT reported a steady set of 1Q18 results, backed by contributions from acquisitions.
  • Its recent acquisition of Penn and Phipps are expected to be completed by 2Q18, and should contribute positively in 2H18. We also see some room for occupancy improvements in Figueroa and Peachtree, with the fundamentals of the US office segment remaining strong.
  • Its portfolio’s average rental rate is still 5-10% below the passing market rental rates – which offers room for positive rental reversions. The threat of faster rate hikes is mitigated by its 100% fixed-debt profile.
  • Manulife US REIT offers attractive FY18F-19F dividend yields of 6.3% and 6.6% respectively, which is more than 100bps over the Singapore office REIT average.
  • Maintain BUY, with a Target Price of USD1.00 (5% upside).

Flattish 1Q18 DPU excluding the rights impact.

  • Manulife US REIT’s (MUST) gross revenue and NPI rose 57.1% and 54.1%YoY respectively, on the back of inorganic contributions from Plaza and Exchange. 
  • Its finance cost rose 92% y-o-y, due to higher borrowings and an increase in borrowing costs related to recent loans taken. The results are in line with our and consensus estimates.

Minimal leases expiring in 2018F; in talks for 2019 lease renewals.

  • Manulife US REIT’s portfolio occupancy rate stood at 95.8% (4Q17: 95.9%). While the occupancy rate rose in Exchange and Figueroa, Peachtree’s occupancy rate declined by 4.1ppts to 92.7%, due to the right-sizing of space by a tenant. 
  • Management sees healthy enquiries for the vacated space and expects to back-fill the space in 6- 12 months. Looking ahead, there would be minimal leases expiring in 2018 (1.9% of gross rental income). 
  • Management is already in discussions for upcoming lease renewals in 2019 (10% of income). The majority of the lease expiry is from a single tenant in Michelson. With its portfolio average rental rate still 5-10% below the market rate, we believe there is room for organic rent growth.

Recent acquisitions expected to be completed by June.

  • In April, Manulife US REIT announced the acquisition of 1750 Pennsylvania Avenue (Penn), Washington and Phipps Tower (Phipps), Atlanta for an aggregate purchase cost of USD387m. Management is currently finalising the funding structure for the acquisition, which is most likely to be a combination of perpetual securities (perps) and fixed debt. 
  • While equity funding is also an option, we believe management is likely to take this route – only if the cost of issuing USD-denominated perps spike up to prohibitive levels, due to the recent volatility in US treasury notes.

100% fixed borrowings minimises rate hike threats.

  • While borrowing costs have been inching up lately on the rising interest rates, we note that 100% of its portfolio debt is currently fixed (interest cost: 2.83%), and the REIT has no debts maturing this year. 
  • While the expectation of more US Federal Reserve rate hikes generally has a negative impact on yield instruments like REITs, we note that rate hikes are coming on the back of a robust US labour market and office demand, which should benefit Manulife US REIT’s DPU growth.

BUY, with an unchanged Target Price of USD1.00.

  • We maintain our DPU estimates. Our DDM-derived Target Price is based on a CoE of 8%, and terminal growth rate of 2%. 
  • Key risks to our call are an unexpected slowdown in the US economy, the REIT not being able to retain key tenants, and changes to its underlying tax structure.

Vijay Natarajan RHB Invest | 2018-05-02
SGX Stock Analyst Report BUY Maintain BUY 1.000 Same 1.000