Manulife US REIT - RHB Invest 2019-09-20: Accretive Acquisition Of 400 Capitol; BUY


Manulife US REIT - Accretive Acquisition Of 400 Capitol; BUY

  • BUY this Top Pick, Target Price rises by 2% to USD1.00, 10% upside with 7% FY19F yield.
  • MANULIFE US REIT (SGX:BTOU)’s yield-accretive acquisition of 400 Capitol is an overall positive, and further diversifies its portfolio tenant mix and market exposure. The completion of the acquisition will also help Manulife US REIT meet the criteria for FTSE EPRA Nareit index inclusion (in December), which should trigger a positive re-rating.
  • Valuations are still attractive – the stock is trading at 1.1x P/BV and offers a 7% FY20F dividend yield.

Another high-quality asset enters the portfolio.

  • Manulife US REIT announced the acquisition of 400 Capitol in Sacramento, California (freehold Class-A office building) at USD198.8m (1% discount to valuation), with an implied cap rate of 7.2%. The asset is 94.9%-occupied, with a current average rental rate of USD39.3psf, ie 5-12% below asking rates. The leases also have an in-built average rental escalation of 2.3% pa. Its weighted average lease expiry (WALE), at 5.9 years, is slightly lower than Manulife US REIT’s portfolio WALE of 6.2 years.
  • Addressing our concerns on Wework being the second largest tenant (10% of GRI) of the property, management noted that Wework is on a long-term lease ( > 7 years) and does not have much presence in the sub-market. The acquisition is expected to be completed by 4Q19.

Positive dynamics.

  • Based on Cushman & Wakefield data, there is very limited supply of upcoming office space in the micro-market. Also, the high replacement cost of ~USD700psf (purchase price: USD397psf) limits potential speculative supply. The demand outlook for office space remains robust as well, due to Sacramento’s growing economy and connectivity.

Funding mainly via equity, gearing to dip upon completion.

  • In conjunction with the acquisition, Manulife US REIT announced a placement and preferential offering to raise gross proceeds of USD142.1m (the majority will be used to fund the acquisition). Post-fund raising and acquisition, gearing is expected to contract to 36.6% from 37.1%, providing > USD100m of debt headroom for future acquisitions.
  • Overall, the acquisition is accretive to both DPU (+2.3% to 1H19 DPU) and NAV (+0.6%), based on the above assumed fund-raising exercises.

Index inclusion in sight and potential upside from tax structure rollback.

  • The completion of the acquisition and fund-rising exercise should help MUST meet the key criteria to enter the FTSE EPRA Nareit Developed Asia Index, which is widely tracked. This would also trigger a re-rating on the stock, in terms of liquidity and visibility.
  • Manulife US REIT is also awaiting the finalisation of proposed US tax regulations (Dec 2018), after which it should be able to roll back to its IPO tax structure – resulting in additional tax savings of ~1.5%.

DPU adjustments.

  • Factoring in the acquisition and fund-raising exercises, our FY19-21F DPU increases by 1-3%, which leads to a higher Target Price.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-09-20
SGX Stock Analyst Report BUY MAINTAIN BUY 1.00 UP 0.980