Manulife US REIT - RHB Invest 2019-05-02: Fortifying Its Income Stream; Keep BUY

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Fortifying Its Income Stream; Keep BUY

Stay BUY with Target Price increased 2% to USD0.96, 10% upside plus 7% yield.
MANULIFE US REIT (SGX:BTOU) remains a sector Top Pick.
The latest Centerpointe acquisition is DPU/yield-accretive and, again, demonstrates its ability in adding good quality assets. Manulife US REIT is still one of the prime beneficiaries of continued momentum in the US office sector.
Valuations are still attractive, with the stock trading at 1x P/BV (S-REITs average 1.1x).

MANULIFE US REIT (SGX:BTOU) announced acquisition of Centerpointe I & II (Centerpointe) in Virginia for USD122m, at par with its latest valuation (see page 2 for property details). The asset comes with a superior NPI yield of 8.3% (cap rate: 7.6%) and has a high occupancy of 98.7%.
Historically, the property has enjoyed high average occupancy of 94% over the last eight years due to its good quality, location, and amenities. The acquisition – which will be funded by a combination of equity and debt – is highly accretive (+3.3%) to Manulife US REIT’s pro-forma FY2018 DPU.

In Nov 2018, Amazon announced its plans to build a corporate headquarters, Amazon HQ2, in Arlington, Virginia, or a c.30 minutes’ drive from Centerpointe. The setup of Amazon HQ2 is likely to fuel a multi-sector office, residential, hospitality, and retail boom in the area, which should benefit Centerpointe.
The property also has a very good tenant base, with three of its top five tenants having their HQs in the building. IT (35%), finance & insurance (25%), and public administration (16%) are the key tenant trade sectors – this will help in further diversification of Manulife US REIT’s tenant base, which is currently dominated by legal firms and the finance sector.
Weighted average lease expiry (WALE) is long at 6.9 years, with < 5% of leases expiring before 2021.

100% of the leases have built-in rental escalations of 2.5-3% pa. The current passing rents are c.USD 33psf, while the asking rents are c.USD 34psf. The property’s rent has been generally at a 10-25% premium to the market over the last eight years due to its superior attributes.
While we do not foresee a near-term rental uplift, its strong market positioning, long WALE, and good quality tenants provides comfort in terms of earnings visibility.

In conjunction with this acquisition, Manulife US REIT announced a placement of 114m shares – this raised USD94m in gross proceeds, with the remainder funded by debt. The placement also lowers its gearing to 36.8% from 37.6%, providing more debt headroom for future acquisitions.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-02

SGX Stock Analyst Report BUY MAINTAIN BUY 0.96 UP 0.940