Manulife US REIT - Maybank Kim Eng 2019-11-05: Stable Quarter, DPU Visibility


Manulife US REIT - Stable Quarter, DPU Visibility

In line with MKE/street; BUY

  • MANULIFE US REIT (SGX:BTOU)’s 3Q19 DPU of USD1.48ts was down 2.0% y-o-y, but inline with consensus and our estimates, due to an enlarged unit base (by 6.5%) resulting from the Capitol asset acquisition.
  • Our DPU forecasts and DDM- based USD1.05 Target Price (COE: 7.6%, LTG: 2.0%) are unchanged. See Manulife US REIT Share Price; Manulife US REIT Target Price.
  • We continue to favour Manulife US REIT for its DPU visibility, supported by stable income growth and low leasing risks. Valuation is compelling with DPU yields of 6.5-6.8% for FY19-20E vs 4.5-5.5% offered by its office S-REIT peers. See Manulife US REIT Dividend History.
  • We see DPU upside as low 36.3% gearing supports further acquisitions, and potential re-rating as its inclusion in the FTSE EPRA NAREIT index is in sight.

Quiet quarter on leasing front

  • Revenue and NPI rose 13.3% y-o-y and 11.8% y-o-y, boosted by the contribution from Centerpointe, acquired in May-19. 9M19 revenue, NPI and DPU achieved 76% of our full-year forecasts. Manulife US REIT's portfolio occupancy edged up to 97.3% from 97.2% in 2Q19. See Manulife US REIT Announcements.
  • Leasing activity was slower at 32k sf in 3Q19 at a high single-digit rental reversion, according to management. This brought 9M19 to a total of 400k sf (10% of leases by NLA) at an 8.5-year WALE and +2.7% pa rental escalations. All assets, except for Michelson, are trading at 5-10% below market rents.
  • We expect both occupancies and rents to be supported due to limited new supply in each sub-market.

Long WALE, low leasing risk

  • Manulife US REIT's WALE was stable at 6.2 years with 62.3% of leases by NLA expiring in 2024 and beyond. WALE for its top 10 tenants (who make up 38.9% of its gross rental income) was higher at 6.9 years, while co-working tenancies comprised 1.9% of its gross rental income.

Strong balance sheet, further deal upside

  • Gearing has risen steadily to fund six acquisitions since its May 2016 IPO but it remains at a comfortable 36.3% (37.4% post-Capitol as it was completed on 29 Oct), providing about USD250m more in debt headroom.
  • We expect acquisitions to provide upside to DPUs, supported by 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/ 2019-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.050 SAME 1.050