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


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).

Centerpointe a good accretive addition to its portfolio.

  • 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.

Likely beneficiary of upcoming Amazon HQ2.

  • 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.

Built-in rent escalations provides organic growth.

  • 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.

Funding mainly via equity.

  • 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.

DPU adjustments.

  • We revise higher our FY19-21F DPU 2-3% to factor in tion contributions.

Vijay Natarajan RHB Securities Research | 2019-05-02
SGX Stock Analyst Report BUY MAINTAIN BUY 0.96 UP 0.940