Manulife US REIT - DBS Research 2020-06-23: Early Bird Catches The Worm


Manulife US REIT - Early Bird Catches The Worm

  • Manulife US REIT's expiring leases in FY20F reduced to c.4% with long WALE of 5.7 years.
  • Committed occupancy and collections remain healthy.
  • Yield spread to remain favourable as Fed to hold rates low for a longer period.
  • Maintain BUY; lower Target Price to US$1.00.

Manulife US REIT – 1Q2020 Operational Updates

Occupancy stable in 1Q2020; expect lower cost of debt from refinancing:

  • Manulife US REIT (SGX:BTOU)'s cccupancy increased 0.7ppt q-o-q to 96.5% on a WALE of 5.7 years. Manulife US REIT executed 147k sqft of leases in 1Q2020 at +8% rental reversions with WALE of 7.8 years.
  • Leases expiring in FY2020 has reduced to 4.4% of GRI vs 5.2% in 4Q19 following the execution of new leases and renewals in 1Q2020.
  • Manulife US REIT is in the process of refinancing the Peachtree loan due in July 2020 and expected cost of debt will be lower than the current 2.46%; this would reduce its average cost of debt from 3.37% in 4Q19.

Manulife US REIT – COVID-19 impact / Outlook

Minimal rental deferment with majority of rents collected:

  • Manulife US REIT has provided rental deferment to c.2% of tenants by GRI which comprises largely retail / F&B tenants mainly operating on the 1st floor of its office properties.
  • Management expects there could be more rental deferment requests coming through in 2Q2020 as the lockdown typically impacted US from March 2020 onwards. However, management does not expect the amount to be significant and will consider rental deferment with interest charged on late payments rather than rental rebates.
  • Majority of rents ( > 90%) for April have been collected. 2 out of 3 of the co-working operators within its portfolio have paid their rents for April in full while the remaining co-working operator has made partial rental payment.
  • The transaction market remains slow with most sellers either withdrawing or adopting a wait-and-see approach. Management has not seen a huge amount of distress sales but expect this to increase in a year’s time if the economy takes longer than expected to recover.
  • Management currently does not expect any retention of distributions but will review the situation again at mid-year.

Maintain BUY; lower Target Price to US$1.00.

Where we differ: A better playing field post index inclusion.

  • Manulife US REIT is now placed on a better playing field post index inclusion in the FTSE EPRA Nareit Developed Asia Index where it will likely herald a virtuous cycle of greater investor visibility. Following this, we have already seen higher trading liquidity and yield compression for Manulife US REIT.
  • Given a strong execution and acquisition track record, we believe Manulife US REIT will continue to command a premium to its peers.

Reports on SGX listed US Office REITs

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.00 DOWN 1.150