Manulife US REIT - Maybank Kim Eng 2019-05-02: Accretive Deal

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Accretive Deal

MANULIFE US REIT (SGX:BTOU)’s acquisition of Centerpointe in Washington DC is DPU-accretive and should strengthen its overall AUM profile. We see the asset’s strong tenancies and favourable lease structures supporting stable income growth and increasing DPU visibility.
We revised up DPUs by 0.5% on the higher NPI and new units. Our DDM-based Target Price remains at USD1.00 (COE: 7.7%, LTG: 2.0%).
Manulife US REIT’s valuation is compelling with DPU yields of 6.8- 7.1% FY19-20E vs 4.6-6.5% offered by its office S-REIT peers. Post-deal, we see further DPU upside with low gearing of 36.8% supporting acquisition opportunities.

Manulife US REIT has added another asset to its Washington DC portfolio with the USD122m acquisition of Centerpointe in Fairfax County, Virginia at a 7.55% implied cap rate. The property’s key attributes are its:
1. freehold Class A office specs;
2. strategic location in a high-density metro area between two prominent retail centres and a 30-minutes drive from Amazon’s upcoming HQ2; and
3. strong tenancies in supporting its 98.7% occupancy as of end-Mar 2019.

Centerpointe has historically achieved above-market occupancies with its rental rates on average at a 10-25% premium to other properties in its sub-market. The asset is the headquarters for more than half of its 21 tenants (by NLA), which include large IT corporates and a government agency, and will help diversify Manulife US REIT’s tenancy base.
Importantly, 100% of its leases have embedded rental escalations of 2.5-3.0% p.a. with the 6.9-year WALE to extend Manulife US REIT’s portfolio WALE from 6.0 to 6.1 years.
Post-deal, 56.1% of Manulife US REIT’s leases are expected to expire from 2024 and onwards, up from 54.8% as of end-Mar 2019.

Post-deal, Manulife US REIT's AUM rises by 7.0% to USD1.86b, with NLA up 11.2% to 4.2m sf.
Gearing as expected will remain comfortable at 36.8%, given the 25- 75 debt-equity funding structure; Manulife US REIT on 29 Apr raised USD94.0m in a private placement of 8.9% new units. We expect acquisitions to provide DPU upside, backed by USD101-284m debt headroom and its sponsor’s strong deal pipeline of real-estate assets concentrated in the US.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-02

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