Manulife US REIT - RHB Invest 2019-04-26: Go From Strength To Strength; BUY


Manulife US REIT - Go From Strength To Strength; BUY

  • Maintain BUY, USD0.94 Target Price offers 9% upside plus 7% FY19F yield; still a top sector pick.
  • Manulife US REIT’s 1Q19 results are slightly above estimates. The continued improvement in portfolio occupancy is a testament to its asset quality and capable management team. Rental reversions have been largely positive (on top of rate escalations) since listing, aided by strong market fundamentals and its market positioning. 
  • Key risk: unexpected slowdown in the US economy impacting office space demand.

Manulife US REIT's 1Q19 DPU up 0.7% YoY

  • MANULIFE US REIT (SGX:BTOU)'s 1Q19 DPU up 0.7% y-o-y, which is slightly higher than our estimates but in line with the Street, at 26% of our FY19F DPU. Gross revenue and NPI grew 29%/28% y-o-y, mainly due to contributions from newly-acquired assets Penn and Phipps.
  • Finance expenses rose 56.3% y-o-y on higher borrowings taken to acquire the abovementioned assets. Tax expenses surged 96.6% y-o-y to SGD2.6m, largely due to deferred tax expenses arising on Penn and Phipps, and temporary differences between accounting and the tax base on remaining properties.

Healthy improvement in portfolio metrics.

  • Overall occupancy rate improved 0.7ppt q-o-q to 97.4%, largely due to improvements in occupancy at Peachtree, Atlanta to 99.4%, from 93.7% in 4Q18. Management noted that occupancy rate improvements were mainly due to expansionary demand from its existing tenants in the consulting, co-working and advertising sectors.
  • Earlier this year Manulife US REIT also extended the Hyundai Capital America (Hyundai) leases for another 11 years, allaying investor concerns.
  • Rental reversions for the quarter were positive but management has not disclosed exact numbers due to confidentiality. With Peachtree passing rental rates being ~14% lower than market levels, we believe the rental reversions should be in the range of 5-15%.

US office market fundamentals remain strong.

  • Based on CoStar market research, US office employment remains strong, growing 2.1% y-o-y (4Q18: 1.7% y-o-y) in 1Q19. About 40% of leasing demand was from expansionary activity, led by tenants from the finance, technology and co-working sectors, according to JLL research. With rate hikes on pause, the overall economic outlook remains positive for 2019.
  • On the supply side, there is very minimal competing new supply across office sub-markets where Manulife US REIT’s properties are located in.

Interest cost increase likely to be lower than our initial expectation.

  • Manulife US REIT is currently in advanced negotiations with local Singapore banks to refinance the property loan taken for Figueroa (USD110m). Indicative interest costs have come down to ~3.9%, compared to the initial expectation of slightly over 4% on the back of a dovish interest rate outlook.
  • In its efforts to enhance financial flexibility, management plans to unencumber assets and introduce distribution reinvestment plan.

Room for further upside if the REIT reverts to its IPO tax structure.

  • In Dec 2018, the REIT manager clarified that the proposed US tax regulations and Barbados tax changes are not expected to have any material impact on its current tax structure.
  • Based on the existing tax structure, it pays a minimal rate of 1.5-2.5% in Barbados. However, if the proposed US tax regulations (267A) are finalised, it could revert to its original IPO structure – which does not need to have the existing Barbados hybrid entity. This will result in additional tax savings, with the effective rates likely being close to nil. Our forecast currently does not factor this upside.

Acquisitions possible in the near term.

  • Gearing is modest at 37.6% (ceiling is 45%). With office cap rates across its key markets remaining relatively high at 5- 7%, we believe yield-accretive acquisitions are possible in the near term.

Vijay Natarajan RHB Securities Research | 2019-04-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.940 SAME 0.940