Manulife US REIT - RHB Invest 2020-05-11: Remains Operationally Strong; Top Pick


Manulife US REIT - Remains Operationally Strong; Top Pick

  • Maintain BUY with new Target Price of USD0.90 from USD0.88, 28% upside and c.9% yield.
  • Manulife US REIT’s 1Q operational updates point to a healthy US office market prior to the rapid escalation of COVID-19 in the US. While the US economic and office outlook have deteriorated sharply, recent easing of lockdown raises some hope. Good asset quality, strong tenant profile and minimal near-term lease expiries mitigate risks.
  • Recent rollback of tax structure provides additional savings.

Occupancy improves and positive rent reversion of 8%.

  • Manulife US REIT (SGX:BTOU) signed leases for 147,000 sqf (3% of total) in 1Q with 65% of them being new leases. Demand came from legal, technology, finance & insurance and real estate-related sectors with higher expansionary demand. The leases signed also have an in-built annual rent escalations of 2-3.5% pa.
  • Leasing demand has understandably come to a halt since March but Manulife US REIT is in a good position with only 4% and 6% of leases due for renewal in FY20F-21F.

Minimal impact so far from COVID-19 but a clearer picture likely to emerge in coming months.

  • Manulife US REIT has received some rent relief requests from tenants but it does not sees merit in all. It has so far provided rental deferment for only 2% of tenants (by rental income) – majority in the F&B segment in its office buildings – and currently, does not intend to provide rental waiver.
  • A vast majority of April rents has been collected. Two of three co-working tenants have paid April rent, with another paying partial amount, which we believe is Wework (~2% of Manulife US REIT’s total income). All nine of its office assets remain operational but physical occupancy by employees remain low at 5-10%.
  • Manulife US REIT is currently focusing on cost reduction at its buildings and has deferred all non-essential capex to reduce operating expense. Positively, most of the US states have started easing some of the lockdown measures, which should revive some economic activity.

Refinancing of 2020 loans at lower interest rates.

  • Manulife US REIT has secured commitments for its Peachtree loan (~USD70m) with an all-in interest cost expected to be lower than the current rate of 2.46% pa. Management noted that banks have eased liquidity post initial knee-jerk reaction in March and spreads have not widened. 95% of its debt is currently fixed.

Finalisation of tax regulations to result in tax savings of ~1% pa.

  • The final regulations relating to Section 267A of the United States Internal Revenue Code were announced on 20 Apr. Based on the final regulations, Manulife US REIT would be able to revert its tax structure to that which was in place during its listing ie without the need for a Barbados entity it currently has. The move should result in an annual tax savings of 0.7% pa from 2021.

Earnings changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-11
SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 UP 0.880