Manulife US REIT - OCBC Investment 2020-07-24: Resilient Portfolio Amid Market Turmoil

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Resilient Portfolio Amid Market Turmoil

Manulife US REIT (SGX:BTOU) is a Singapore-listed real estate investment trust (REIT) with a portfolio of nine prime, freehold and Trophy or Class A office properties, strategically located in the key business districts across eight U.S. cities. The properties are well-diversified with no single primary market constituting more than 20.6% of AUM and no single property contributing more than 16.6% of the portfolio’s AUM or 19.0% of NPI for FY19.
Given the macroeconomic uncertainties, we look upon its diversified portfolio of high-quality assets favourably.

Manulife US REIT’s overall portfolio weighted average lease expiry (WALE) stood at 5.7 years. Lease expiries are well spread-out, with only 4.4%/6.4% of leases by gross rental income (GRI) due to expire in FY20/21.
Leasing momentum in the U.S. office market was inevitably been affected by Covid-19 in 1H20 with gross leasing volume dropping 20.8% in 1Q and further deteriorated by 53.4% in 2Q. Occupancy also saw a record loss of 14m square feet, bringing YTD net absorption to -8.4m square feet.
While leasing momentum is likely to remain weak in the near-term, the minimal lease expiry profile of Manulife US REIT could limit the downside risks from a weak office market amid economic uncertainties.

Manulife US REIT enjoys healthy organic growth with embedded rental escalation clauses. 95.6% of its total leases have built-in escalations which are on annual and periodic fixed rate basis, averaging 2% per annum. We view this lease structure favourably and believe that Manulife US REIT could benefit from rental upside during market upcycles while enjoying a level of protection during market turmoil.

Manulife US REIT’s portfolio has a diversified tenant base with over 180 tenants (as of 31 Dec 2019) spread across 20 different trade sectors with no single trade sector accounting for more than 22.1% of GRI. Legal (22.1%), Finance and Insurance (20.1%), and Retail Trade (13.5%) are Manulife US REIT’s top 3 tenants by GRI, making up 55.7% of the portfolio’s GRI.
One third of Manulife US REIT’s portfolio are headquarter (HQ) tenants who tend to keep their HQ office space should they choose to consolidate their space requirements.
In terms of rental collections, as at early Jul, Manulife US REIT has collected ~100% of April’s rents, ~95% and 90% of May and June’s rents respectively as compared to the average rental collection rate of 96-97% pre-Covid-19.
Only 2% of its tenants have asked for rental deferment, largely from F&B (1% of portfolio), underscoring the resilience of Manulife US REIT’s tenant profile. As U.S. reopens from the lockdowns gradually, we could see rental collection return slowly to normalcy.

Manulife US REIT is currently trading at FY20F P/B of 0.94x, which is almost one standard deviation (s.d.) below its historical forward average of 1.03x. FY20F distribution yield is attractive at 8.0%, which is 1.5 s.d. above its historical mean of 7.1%.
We believe overall valuations are undemanding given Manulife US REIT’s resilient portfolio. Based on the DDM methodology (cost of equity: 8.3%, terminal growth rate: 1.25%), we derive a fair value estimate of US$0.84 for the stock.
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.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-07-24

SGX Stock Analyst Report BUY MAINTAIN BUY 0.84 SAME 0.84