Manulife US REIT - RHB Invest 2019-11-05: More Goodies To Come; Maintain BUY


Manulife US REIT - More Goodies To Come; Maintain BUY

  • Maintain BUY and USD1.00 Target Price, 10% upside plus c.7% yield.
  • MANULIFE US REIT (SGX:BTOU), which remains one of our Top Picks, had 3Q/9M19 results that were in line.
  • Key takeaways are the continued occupancy improvement and positive rent growth. Post recent acquisitions and placement, the REIT is likely to meet the criteria for the FTSE EPRA NAREIT Index inclusion, which should act as a near-term catalyst.
  • Valuations are still attractive at 1.1x P/BV. See Manulife US REIT Share Price; Manulife US REIT Target Price.

Manulife US REIT's 3Q adjusted DPU down marginally by 2.6%YoY.

  • Gross revenue/NPI grew 13.3%/11.8% y-o-y on the Centerpointe acquisition. DPU, however, was slightly lower y-o-y due to higher financing costs, rent-free periods for leases signed, and slightly higher income tax. The adjusted DPU came in line with 3Q/9M19, accounting for 24%/74% of our full-year forecasts. See Manulife US REIT Announcements; Manulife US REIT Dividend History.
  • Looking ahead, financing costs are expected to moderate with recent loans secured ~40bps lower than weighted average interest cost.
  • Portfolio occupancy inched up 0.1ppt q-o-q to 97.3% due to occupancy improvement in Figueroa and Penn.

Co-working makes up only 1.9% of rental income.

  • Addressing concerns on co-working spaces, management noted that this segment is still small and made up c.1.8% of total office spaces in the US.
  • Manulife US REIT has ~1% exposure to WeWork, which is one of the key tenants in its recently acquired 400 Capitol. Management noted that the WeWork lease for the property is fairly long at 15 years with a break clause available only at the end of the ninth year. Thus, it does not see any risk from co-working operators in its portfolio.

Expecting mid-single digit rent reversions for FY20F.

  • In 3Q, only a few leases were signed (~33,000 sqf) – management noted that there was good positive rent growth. YTD, c.400,000 sqf of leases were signed with slight positive rent reversions (low single digits in our view). The key reason for the lower YTD rent reversions is mainly due to Michelson’s leases, which were marked to market.
  • Overall, the current portfolio average rents are still 5-15% below market level except for Michelson.
  • For 4Q19/2020, about 2.2%/6.9% of leases by rental income are pending renewal – we expect mid-single digit rental reversions.

Key near-term catalysts are Index inclusion and tax structure rollback

  • Post completion of 400 Capitol acquisition and associated equity fund raising Manulife US REIT is likely to meet the index inclusion criteria for the FTSE EPRA Nareit Developed Asia Index. This should help in the REIT’s re-rating, in terms of liquidity and visibility. (See SGX Market Update: Recent SGX Additions to FTSE EPRA Nareit Global Developed Index)
  • Manulife US REIT is also awaiting the finalisation of proposed US tax regulations – the REIT should be able to roll back to its IPO tax structure, resulting in additional tax savings of 1.5%.

Vijay Natarajan RHB Securities Research | 2019-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.000 SAME 1.000