Manulife US REIT - UOB Kay Hian 2018-05-02: 1Q18 Results In Line

Manulife US REIT - UOB Kay Hian 2018-05-02: 1q18 Results Of Must In Line MANULIFE US REIT SGX: BTOU

Manulife US REIT - 1q18 Results Of Must In Line

  • Results of Manulife US REIT (MUST) are in line with our expectations.
  • MUST’s portfolio will grow from US$1.3b to US$1.7b following the yield-accretive acquisition of 1750 Pennsylvania Avenue and Phipps Tower.
  • Maintain BUY and target price of US$1.12. Maintain OVERWEIGHT on the sector.

Results in line with expectations; maintain BUY and target price of S$1.12

  • Results in line with expectations; maintain BUY and target price of S$1.12, based on DDM (required rate of return: 7.8%, terminal growth: 2.5%). Manulife US REIT (MUST) posted 1Q18 distributable income of US$15.6m, up 50.1%. 1Q18 gross revenue and NPI were both up 57.1% and 54.0% y-o-y respectively, due to contributions from the acquisitions of Plaza and Exchange, but partially offset by lower income from Michelson and Figueroa. Results are in line with our expectations, with 1Q18 distributable income forming 25.3% of our full-year forecast.
  • Portfolio occupancy remained stable at 95.8% (vs 95.9% in 4Q17). MUST has less than 10% of its leases by NLA expiring in the next two years, and a still-long WALE of 5.7 years offering strong income visibility.
  • Gearing increased to 34.1% (+0.4ppt qoq). The weighted average debt maturity is 3.2 years, which was extended by one year by funding acquisitions of Plaza and Exchange with 5-year fixed rate debt in 2017.
  • Interest rates remained stable at 2.83% (flat q-o-q) with interest coverage ratio at 4.7x. According to minutes of the last FOMC meeting, the Fed expects to raise rates twice more in 2018, and three more times in 2019. The increases have not impacted MUST’s current borrowings, given that it has financed 99.8% of its borrowings via fixed rate loans. No refinancing is also required until mid-19.
  • US office market outlook. Management noted from JLL findings that although annual US rent growth continues to climb, concession packages are also increasing, putting pressure on net effective rents. Office absorption nationwide also slowed to 3.7m sf in 1Q18, due to reduced tech activity, skilled talent shortages, and softness in the energy sector. Vacancy nationwide also remained stable at 14.8% at 1Q18.
  • Markets where MUST has presence in, such as Los Angeles, Orange County, and Atlanta, continued to achieve above-average growth in the last 12 months, due to limited new supply and/or steady growing demand. However, rent growth in Northern New Jersey has lagged national average. Management also guided that market conditions continue to be favourable across the five locations MUST has invested in, with minimal new supply and rising market rents.
  • The proposed US$387m acquisition of 1750 Pennsylvania Avenue and Phipps Tower will extend MUST’s footprint into Washington, the capital of USA, and gain exposure to Buckhead, Atlanta’s strongest office submarket. Post-acquisition, MUST’s NLA will grow to 3.7m sf (vs 3m sf), lengthening its WALE to 6.3 years by NLA (vs 5.7 years), and improve tenant diversification at portfolio level (with contribution from top 10 tenants decreasing from 45.9% to 44.1%). At the same time, it will add three new tenants – Carter’s, US Department of Treasury, and UN Foundation – among its top 10. Penn and Phipps will also make up 11% and 12% respectively of the enlarged portfolio valuation.
  • Fair transacted price and immediate yield-accretion of 1.4% expected. Penn and Phipps have NPI yields of 5.2% and 5.9% respectively, and pro-forma DPU yields are estimated at 6.36% for FY17 based on a debt cost of 4.5% fixed-rate (assuming funding mix of 45% debt, and 55% perpetual securities). Transacted price is fair (i.e. 1.8% discount to average appraised values). MUST’s purchase consideration of Penn at US$182m and Phipps at US$205m, represent discounts of 1.1-2.2% and 1.5-2.5% respectively, according to appraised values by C&W and Colliers.
  • Funding-mix options. A mix of debt, equity, and/or perpetual securities (i.e. under US$1b Multicurrency Debt Issuance Programme) may be used to fund the total purchase price (US$387m), professional and other transaction fees and expenses (US$9.0m). The funding mix for the acquisition will depend on prevailing market conditions, interest rates, alternative funding options, the impact on MUST’s capital structure, DPU, debt expiry profile and terms associated with each financing option. However, the acquisition fee (US$2.9m) will be paid in the form of units of Manulife US REIT.
  • Making headways to US$2.6b AUM target. Post-acquisition of 1750 Pennsylvania Avenue and Phipps Tower, MUST’s AUM will increase from US$1.3b to US$1.7b. Management guided that they will continue to search for yield-accretive investment opportunities.

Vikrant Pandey UOB Kay Hian | Peihao Loke UOB Kay Hian | 2018-05-02
SGX Stock Analyst Report BUY Maintain BUY 1.120 Same 1.120