Manulife US REIT - CGS-CIMB Research 2019-06-18: Premium US Office Landlord


Manulife US REIT - Premium US Office Landlord

  • MANULIFE US REIT (SGX:BTOU) offers exposure to a portfolio of premium US office properties.
  • Property market studies indicate that supportive macro economic and robust sector fundamentals underpin continued rental growth.
  • The stock is trading at 7% annualised 1Q19 dividend yield.

A portfolio of Class A and trophy assets

  • MANULIFE US REIT (SGX:BTOU) has a portfolio of premium office properties located in Los Angeles, Irvine, Atlanta, Secaucus, Jersey City and Washington, D.C.
  • Since listing on 20 May 2016, Manulife US REIT's portfolio has grown from three properties to eight, with the latest acquisition of Centerpointe I & II in Fairfax in Jun 2019. Its current portfolio comprises 4.16m sq ft of net lettable area valued at US$1.86bn as at Jun 2019.

Well-located portfolio

  • Manulife US REIT’s portfolio is well-located within the top 10 Metropolitan Statistical Areas (MSA) in terms of median household income, population and GDP metrics.
  • By value, its largest asset is the Michelson, accounting for 18.5% of portfolio value but making up 12.8% of portfolio NLA (as at Jun 2019). This is followed by Exchange which accounts for 18.3% of portfolio asset under management (AUM) and but 17.7% of NLA.
  • Following the acquisition of Centerpointe in Jun 2019, Manulife US REIT’s portfolio weighted average lease expiry (WALE) lengthened from 6 years to 6.1 years while its portfolio occupancy expanded to 97.6%. Tenant mix is well distributed between the top 5 trade sectors – legal, financial & insurance, retail trade, information and public administration, such as government agencies – comprising 68.5% of Manulife US REIT’s portfolio.

US office market outlook underpinned by favourable macroeconomic factors

  • According to management, as well as the property consultants we spoke to, outlook for the US office market as a whole remains robust, underpinned by favourable macroeconomic factors. US GDP growth has shown consecutive quarters of y-o-y growth since 2016 with the latest 1Q19 GDP showing 3.2% expansion.
  • In addition, unemployment rate has been trending down over 2009- 18, even as US office employment numbers have been inching up. As a result, US office net absorption has been keeping pace with new office completions, translating into a steady increase in occupancy rates.

Strong sponsor

  • Manulife US REIT is managed by Manulife US Real Estate Management Pte Ltd (the Manager) which is wholly-owned by the sponsor, The Manufacturers Life insurance Company (Manulife), part of the Manulife Group.
  • The sponsor’s parent company Manulife Financial Corporation (MFC) is a leading international financial services group. It operates as John Hancock in the US and Manulife elsewhere, providing financial advice, insurance, and wealth and asset management solutions to individuals, groups and institutions.

Site visits to Atlanta and New Jersey

  • We visited four properties in Manulife US REIT’s portfolio – Peachtree and Phipps Tower in Atlanta, as well as Plaza and Exchange in New Jersey. These 4 properties accounted for c.54% of Manulife US REIT's portfolio NLA as at Jun 2019 and 47% of its total portfolio value. The properties boast of 97.7-100.0% occupancy, higher than their respective submarket metrics.
  • These assets are key properties in their respective submarkets and well-positioned to tap on the specific advantages of their strategic locations, as well as broader supply/demand fundamentals within their respective submarkets according to management.

Atlanta sub-market

  • We toured Peachtree and Phipps Tower in Atlanta.
  • Peachtree is prominently located in the heart of midtown Atlanta and in close proximity to two subway stations – Midtown and Arts Centre. Peachtree is a 27- storey Class A office building with c.550,000 sq ft of NLA located on Peachtree Street within the Midtown submarket of metropolitan Atlanta. Building amenities include a high-end seafood restaurant, a sandwich café, news and sundries shop, fitness centre, and a large conference centre. It is also connected to an adjacent parking garage with 1,221 parking lots.
  • According to management, the property is located on the Midtown Mile, a stretch of office, retail and multi-family developments on Peachtree Street, conceived as a blueprint for Midtown in the late-1990s. This area now houses numerous retail, dining and hotel offerings, as well as high-end condominiums and luxury apartments.
  • Phipps Tower is strategically located in the Buckhead office market in Atlanta, one of the primary business districts in Atlanta. Phipps Tower is a 19-storey Trophy office tower with c.840,000 sq ft of NLA. The property is part of an 8- building Trophy set of the Upper Buckhead micromarket. Phipps offers various facilities to tenants including a farm-to-table café, sundry shop, fitness centre, a conference centre, and five levels of covered car park space with 1,150 lots. Phipps Tower is located within walking distance from the Buckhead Metropolitan Atlanta Rapid Transit Authority (MARTA) station and provides good accessibility to convenient area amenities including direct covered access to super-regional Phipps Plaza shopping centre.
  • Buckhead is located about seven miles northeast of the Atlanta central business district (CBD) and is highly accessible to the Atlanta metro area via Peachtree Road, Wieuca Road and Georgia 400. It has high-end retail and entertainment venues and is surrounded by an upscale residential area.

Atlanta office market

  • According to Cushman & Wakefield, Atlanta is the 9th largest city in the USA by population size and enjoyed 41% total population growth over 2000-18. Based on Forbes 2018 and Wallethub 2018 studies, Atlanta ranked first in the fintech market in the US and also took pole position in the US job market for Science, Technology, Engineering and Mathematics (STEM) graduates per capita. The property consultant projects Atlanta to continue enjoying above-national-average population growth of 1.9% CAGR from 2018-2025F and office-using employment growth to increase by 20-25% p.a. between 2019-22F.
  • According to Cushman & Wakefield, the Atlanta economy continued to grow in 1Q19, with 2.1% expansion in job creation compared to 1% growth nationwide. Atlanta’s 3.6% unemployment rate remains below the national level of 3.8% in 1Q19. The property consultant said that the overall US economy continues to show strength in 2019 and Atlanta has been leading in terms of job, GDP and population growth.
  • In terms of the office market, while most demand growth has been focused in the CBD (Midtown, Buckhead and Downtown), rents were rising faster in the suburban areas. Class A absorption was robust in 1Q19 at about 374k sq ft, stronger than any individual quarter’s absorption in 2018. Overall vacancy declined to 16% in 1Q19, 20bp down from the previous quarter, and remains well below the historical 5-year average of 16.7%.
  • As a result of rising occupancies, rental growth in the CBD was healthy at 3.7% y-o-y in 1Q19, especially in the Midtown area that saw occupancy jumped 13% y-o-y. Rental growth was even faster in the suburban markets at 4.2% y-o-y. CBD rents dipped slightly q-o-q in 1Q19 after rising for five consecutive quarters since 3Q17. Cushman & Wakefield believes sustained population and job growth will continue to support rental expansion in future. This is backed by the widening gap between existing Class A assets and new construction, as well as rising replacement costs, which Cushman & Wakefield anticipates would accelerate 5.5% from 2019-30F.
  • Cushman & Wakefield expects office demand growth to be led by co-working tenants and professional services sectors. Current co-working tenant take-up represents 2.5% of office inventory in New York City and San Francisco but less than 1% in Atlanta.
  • Based on Cushman & Wakefield studies, within the Midtown micromarket, overall vacancy was at 9.7%, while overall rental rate stood at US$37.80 per sq ft as at 1Q19. There are 573,270 sq ft of projected deliveries for 2019, according to Cushman & Wakefield.
  • For the Buckhead micromarket, overall vacancy is at 14%, while overall rental rate stood at US$36.28 per sq ft as at 1Q19. There are no projected new deliveries for 2019, according to Cushman & Wakefield.

New Jersey and Hudson Waterfront submarkets

  • We visited Plaza and Exchange located in Meadowlands Northern New Jersey and Central New Jersey, respectively.
  • Plaza is located in a 550-acre mixed-use amenity base of Harmon Meadow in Secaucus, in the Meadowlands submarket of Northern New Jersey. The property is a 11-storey Class A office building with 460,000 sq ft of NLA. It went through major refurbishment in 2015-16, with improvements to amenities and substantial upgrades to the finishes and grounds. On-site amenities include a 5- storey atrium lobby, café and lounge, executive conference centre, high-end fitness centre and building-wide WIFI connectivity.
  • This locale offers a ‘work, live, play’ environment with deep access to a highly-educated labour pool. This region is home to major Fortune 500 companies including Automatic Data Processing (ADP US), Celgene (CELG US), Merck (MRK US), Prudential (PRU US) and Toys “R” Us. Apart from its close proximity to New York City and location within 10 miles of Newark Liberty International Airport and Port of New York, Meadowlands offers direct connectivity to Midtown Manhattan via New Jersey transit bus and shuttle service to Secaucus Junction train station. The Meadowlands market is regarded as the premier entertainment destination in Northern New Jersey, with Plaza being surrounded by hotels, restaurants and other lifestyle amenities.
  • Exchange is a 30-storey class A office building with approximately 730,000 sq ft of NLA located in Jersey City directly on the Hudson River Waterfront. The property is located at 10 Exchange Place in Jersey City, adjacent to the Exchange Place Station which allows direct commute to New York City within 10 minutes. The building is well equipped with various facilities including a newsstand, coffee house and on-site food service options, as well as in-building parking facilities. The building is currently undergoing asset enhancement activities in the lobby area.
  • New Jersey is a cost-effective alternative to downtown Manhattan, as it is close to transportation links through interstate highways and proximity to the Newark Liberty International, LaGuardia and John F. Kennedy airports. In the past decade, this area has attracted numerous global institutions that chose to relocate, and in recent years it has attracted other businesses including technology firms.

New Jersey office market

  • According to Jones Lang Lasalle (JLL), the New Jersey office market saw overall vacancy declining 20bp from end-2018 to 23.2% at end-1Q19 due to demand for smaller-sized offices. Pharmaceuticals/life sciences sector accounted for close to 30% of transactions (by area) in early-2019 compared to the take-up domination by banking and financial sectors in 2018.
  • The Northern and Central New Jersey areas saw 2.4m sq ft of office leasing activity in 1Q19. JLL expects redevelopment of older and vacant office sites in New Jersey to continue, maintaining downward pressure on vacancy rate there.

Hudson Waterfront office market

  • The Hudson Waterfront submarket comprises Jersey City, Weehawken and Hoboken. The area has historically attracted many large financial services firms and is one of the most prominent office markets in New Jersey due to its proximity to New York City. New leasing activity remained healthy in 1Q19 (161,893 sq ft transacted during the quarter), driven by mid-sized leases, while vacancy rate dipped marginally to 17.7%.
  • Average rent rose marginally by 0.8% y-o-y in 1Q19 due to availability of large blocks of space in the market. Cushman & Wakefield expects asking rents for Class A space to remain close to historical high levels as the Waterfront’s proximity to New York City would keep this location on potential tenants’ radar.

Meadowlands office market

  • Based on JLL estimates, overall office vacancy in Meadowlands was at 18.3% in 1Q19, 5% pts lower than in Northern New Jersey. The average rent for Class A office space in Meadowlands was just above US$28 per sq ft in early-2019. With declining vacancies in the Hudson Waterfront area, tenants seeking office space in proximity to Manhattan would have to expand west into the Meadowlands market.


1Q19 adjusted DPU up 0.7% y-o-y

  • Manulife US REIT posted a 28.5% 1Q19 DPU (adjusted for its preferential offering in Jun 2018) showed a more modest 0.7% growth rate. 1Q19 financial performance did not include Centerpointe I & II, the acquisition of which was completed in Jun 2019.
  • See Manulife US REIT's dividend history.

Robust balance sheet

  • Manulife US REIT’s gearing stood at 373.28%. About 98.2% of its loans are on fixed rates. Management indicated that it is in advanced negotiations to refinance Figueroa’s loans and is likely to benefit from the lower interest rate environment.
  • Following the acquisition of Centerpointe and a private placement exercise in Jun 2019, Manulife US REIT’s gearing level improved to 36.8%.

Dividend yield close to long-term average level

  • Based on 1Q19 DPU of 1.51 US cts, Manulife US REIT is trading at an annualised FY19F yield of c.76.8%.
  • On P/BV terms, the stock is trading at 1.08x end-FY18 book value.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-18
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