Manulife US REIT - RHB Invest 2020-02-06: Building A Robust Diversified Portfolio


Manulife US REIT - Building A Robust Diversified Portfolio

  • Manulife US REIT's 4QFY19 numbers are in line with our (24%) and Street estimates. Its good-quality diversified US office portfolio still benefits from favourable market dynamics, remaining relatively immune to the coronavirus threat, with largely domestic-centric tenants.
  • Manulife US REIT has outperformed peers since its recent index inclusion (Dec 2019), and should sustain this near-term momentum on a possible capital rotation into US office REITs, which are less impacted by the recent virus outbreak.

4Q19 adjusted DPU declined 4.6% y-o-y

  • Manulife US REIT (SGX:BTOU)'s 4Q19 adjusted DPU declined 4.6% y-o-y, mainly due to the timing difference from equity-raising and the lower contribution from Michelson.
  • Manulife US REIT’s portfolio occupancy rate declined 1.5ppt q-o-q to 95.8%, dragged down by the occupancy decline in Michelson and Peachtree. For Peachtree, the vacant space was already backfilled in January, at a higher rental rate – bringing the occupancy back to 99%. We expect Michelson’s occupancy to improve in the coming quarters.
  • Overall demand supply dynamics remain favourable in sub-markets, with minimal comparable new supply coming on-stream. This should keep its occupancy rate steady.

Room for organic rental rate growth in 2020.

  • Management reiterated that most of its office assets’ passing rental rates remain 5-10% below the market average, except Michelson where rates are likely to see downward pressure (~10-15% lower). With much of Michelson’s large leases renewed in 2019, there are no chunky leases due in the next seven years. As such, we expect overall rental reversions to be healthy, in the mid-single digits this year.
  • For 2019, Manulife US REIT's portfolio registered a rental reversion of 0.5%. Excluding Michelson, this would be much higher, at +12.1%. Note that rental rate growth is in addition to the average rental escalation of 2% pa.

Acquisitions likely in the near term.

  • Management continues to look out for yield-accretive acquisitions and noted that diversification is a key consideration for asset acquisitions in current market conditions. The recent yield compression (current trading yield: 6%) provides it with an opportunity to make good yield-accretive acquisitions, as US office cap rates are still trading in a wide range of ~5.5% to 7.5%.
  • Gearing remains modest at 37.7% (~USD100m debt headroom, assuming a 40% cap) and we expect acquisitions to be funded by a combination of equity and debt.
  • The proposed US draft tax regulations (Dec 2018) are still pending finalisation, with no final timeline available. Upon finalisation (barring adverse changes), this will enable Manulife US REIT to roll back to its IPO tax structure – which should lead to additional tax savings of ~1.5%.

Earnings and assumption changes.

Vijay Natarajan RHB Securities Research | 2020-02-06
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