Manulife US REIT - RHB Invest 2019-12-13: Moving Into The Next League; Top BUY


Manulife US REIT - Moving Into The Next League; Top BUY

  • Keep BUY with new target price of USD1.10 from USD1.00, 10% upside plus c.6% yield.
  • MANULIFE US REIT (SGX:BTOU), one of our Top Picks, has outperformed YTD +30%, vs S-REITs Index +17% (See Share Price Performance - S-REITs Sector).
  • Key reasons: continued momentum in US office demand, lower interest rates, strong earnings track record and better investor education.
  • With the recent index inclusion increasing stock liquidity and visibility, we expect trading yield discount (c.150bps higher than office S-REIT peers) to narrow further. Post rally, valuations remain reasonably attractive at 1.2x P/BV.

Recent acquisitions and organic rent growth to drive DPU in 2020.

  • In FY19, Manulife US REIT made two accretive acquisitions of Centerpointe, Virginia and 400 Capitol, Sacramento which provide better income/tenant diversification and drive inorganic DPU growth. See Manulife US REIT Dividend History. Overall portfolio rents are still 5-15% below the market barring Michelson, where negative rental reversion is likely to persist, aiding in organic rent growth.
  • For 2020-2021, c.7% and 6% of leases by gross income are due for renewal. We expect positive mid-single digit rental reversions. Additionally 95% of leases have an in-built rent escalation of c.2% pa.

Potential upside from tax structure rollback and recent index inclusion

  • Manulife US REIT is currently awaiting the finalisation of the proposed US tax regulations, which we expect to be announced by 1H20. If there are no additional changes to the proposed draft regulations, the REIT will be able to roll back its existing tax structure to IPO tax structure. This will help in avoiding the income tax paid at its Barbados entity, and result in additional tax savings of c.1.5% pa, thereby lifting distributions.
  • The stock’s recent inclusion into the FTSE EPRA NAREIT Global Developed Index has helped raise visibility among institutional investors and improve liquidity, which should aid in further yield compression in our view. See also SGX Market Update: Mapletree Logistics Trust Joining the STI on Dec 23.

US office outlook remains positive; co-working makes up < 2% of total.

  • Based on Jones Lang LaSalle (JLL) latest US office sector report, office rents continue to remain on an uptrend, increasing 0.9% q-o-q in 3Q19. The report also noted that continued flight to quality will keep top-end options limited despite a high supply pipeline.
  • While co-working sector experience tapering office growth continued, demand from high-growth tech, creative, and life sciences tenants continued to drive occupancy gains. We also note that supply ahead in Manulife US REIT’s submarket remains limited.
  • Overall, co-working spaces still account for only < 2% of MUST’s portfolio, thus we see limited impact from the potential fallout of co-working operators for now.

DPU and Target Price adjustments.

  • We revise our FY20F-21F earnings by 1-2% by fine-tuning our interest cost and tax. Our COE is also lowered by 40bps to 7.8% with recent index inclusion increasing liquidity and visibility, as we roll forward our DDM valuation to next year. See Manulife US REIT Share Price; Manulife US REIT Target Price.

Vijay Natarajan RHB Securities Research | 2019-12-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.100 UP 1.000