Manulife US REIT - DBS Research 2019-04-26: First Quarter Touch Down


Manulife US REIT - First Quarter Touch Down

  • Manulife US REIT's 1Q19 DPU jumped 23% y-o-y to 1.51 UScts - in line with expectations.
  • Uplift from two acquisitions made last year.
  • Rents at Manulife US REIT’s properties generally 5-14% below market, which should power up earnings upon renewal of leases.
  • Maintain BUY, Target Price of US$0.92.

What’s New

Strong start to the year – 1Q19 DPU up 23% y-o-y

  • After adjusting for the impact of the rights issue last year, MANULIFE US REIT (SGX:BTOU)'s 1Q19 DPU rose 22.8% y-o-y to 1.51 UScts, which was in line with expectations.
  • The strong start to the year was underpinned by additional income arising from the acquisition of the Penn and Phipps buildings last year. This translated to 28.5% and 27.7% y-o-y increase in 1Q19 revenue and NPI to US$40.0m and US$25.1m respectively.
  • Stripping out the impact of the two acquisitions, underlying NPI fell 2% y-o-y, largely due to the 6% y-o-y decline in NPI for Michelson and Peachtree assets. We understand the drop in earnings contribution for Michelson was due to marginally lower occupancy (96.0% versus 96.5% in 1Q18), timing of recoveries and impact of tenant incentives (TIs) as well as the recent renewal of the recent Hyundai lease renewal.
  • On a cash basis, NPI for Michelson would have fallen c.2% y-o-y. Peachtree’s accounting NPI was also impacted by timing of recoveries and amortisation of TIs. Striping this out, cash NPI for Peachtree would have been 3% y-o-y higher. On a positive note, Peachtree’s committed occupancy has risen to 99.4% as of end 1Q19 from 93.7% and 92.7% at end 4Q18 and 1Q18.
  • The lower earnings from Michelson and Peachtree were offset by 4.5% y-o-y jump in NPI for Plaza which benefited from prior positive rental reversions. Meanwhile, NPI for Figueora and Exchange were stable.
  • Overall portfolio occupancy improved to 97.4% from 95.8% in 1Q18 and 96.7% at end 4Q18 due to the impact of higher occupancies at Peachtree, and Penn and Phipps enjoying close to or at full occupancy.

Stable gearing

  • Manulife US REIT’s gearing was relatively stable at 37.6% with average cost of debt at 3.28%.
  • Manulife US REIT has US$110m worth of debt tied to the Figueroa building that is due to be refinanced this year. Manulife US REIT has indicated that it is in advanced negotiations with local Singapore banks and expects to benefit from the recent flattening of the yield curve.
  • Currently, the proportion of fixed rate debt stands at 98.2% with NAV per unit at US$0.81.

Maintain BUY call with Target Price of US$0.92

  • Manulife US REIT indicated that rents at a majority of its properties are 5-14% below market which provides opportunities to increase rents as leases come up for renewal especially with spot rents in Manulife US REIT’s key markets generally still on an uptrend. This combined with 94% of leases having annual escalations of 2.5-3.0% should underpin a positive outlook for Manulife US REIT’s earnings ahead.
  • Furthermore, at current share price (US$0.875), Manulife US REIT trades on an attractive 6.7-6.8% yield with upside to our estimates if Manulife US REIT refinances its debt below our assumed 4.5% interest rate. Based on our understanding of current market conditions, we believe Manulife US REIT should be able to secure a five-year facility at around 3.95%.
  • Thus, we maintain our positive stance on Manulife US REIT and retain our BUY call and Target Price of US$0.92.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2019-04-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.920 SAME 0.920