Manulife US REIT - CGS-CIMB Research 2020-05-08: Holding Steady

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Holding Steady

Manulife US REIT reported healthy portfolio operating metrics in 1Q20.
Manulife US REIT expects rental reversion for remaining FY20F leases to be flat, after a +8.1% rise in 1Q20.

In its 1Q20 business update, Manulife US REIT (SGX:BTOU) indicated that its operating metrics remained healthy, with portfolio occupancy ticking up to 96.5% from 95.8% at end-4Q19. Weighted average lease to expiry (WALE) stood at 5.7 years and inbuilt portfolio rental escalations average 2% at end-1Q20.

Manulife US REIT renewed/leased c.147.1k sq ft of space in 1Q20 and achieved positive rental reversions of 8.1%. WALE for these new leases average 7.8 years.
During this lockdown period, all its properties have remained open with building occupancies at 5-10%. Management indicated that to date it provided rental deferment to c.2% of its tenants, by rental income, i.e. largely those in the F&B sector that have been impacted by Covid-19.
Looking ahead, Manulife US REIT has a remaining 4% of portfolio gross rental income due to be renewed in FY20F and a further 6.1% in FY21F. Manulife US REIT guides that rental reversions are expected to be flat for the rest of FY20F. With the US lockdown set to ease gradually, management indicated that cleaning and hygiene remain top priority across its properties and it would also continue to focus on expense reduction.

Gearing stood at 37.7% at end-1Q20 while interest coverage ratio is at 3.8x. It has received commitment to refinance its Peachtree loan due in Jul 2020 and management expects to achieve lower refinancing cost than existing levels. 95.1% of its loans are on fixed rates and Manulife US REIT has undrawn committed facilities of US$95.5m.
While Manulife US REIT would likely continue to selectively look for inorganic growth opportunities, market transactions have remained relatively quiet.

We lower our FY20-22F DPUs by 1.9-4.8% as we tone down our rental reversion expectations, partly offset by net savings of c.0.7% of FY19 distributable income as it reverts to its IPO tax structure (without Barbados entities), announced in Apr 2020. Accordingly, our DDM-based Target Price is lowered to US$1.05.
We continue to like Manulife US REIT for its resilient portfolio, with 60% of its tenants from finance, legal, tech, healthcare and government tenants.
See Manulife US REIT Share Price; Manulife US REIT Target Price; Manulife US REIT Analyst Reports; Manulife US REIT Dividend History; Manulife US REIT Announcements; Manulife US REIT Latest News.
Re-rating catalyst: better than expected rental reversions.
Downside risk: protracted slowdown in the US economy which could dampen appetite for office pace.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-08

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