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Manulife US REIT - Phillip Securities 2020-08-05: Portfolio Bulwarked Against Short-Term Uncertainty

MANULIFE US REIT (SGX:BTOU) | SGinvestors.io MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Portfolio Bulwarked Against Short-Term Uncertainty

  • Manulife US REIT (SGX:BTOU)'s 1H20 NPI and DPU were in line, forming 49.2% and 47.0% of our FY20e NPI and DPU.
  • Positive rental reversions of 7.9% for 1H20. Manulife US REIT’s portfolio remained resilient – no increase in subletting within their assets, and no request from tenants to right-size/downsize or relocate thus far. Minimal rental abatement and deferments offered.
  • We remain optimistic on Manulife US REIT’s resilience due to its long WALE, low expiries in FY20/21, tenant quality and tight supply in the markets that Manulife US REIT has a presence in.
  • Maintain BUY with a higher Target Price of USS$0.90. Our higher Target Price is mainly due to the lower cost of equity - lowered from 10.0% to 9.1%.



The Positives


Positive rental reversions of +7.9% on 217,300 sqft (4.6% of NLA) for 1H20.

  • Of the c.217,300 sqft of leases signed, 50% were renewals, 42% were new leases and 8% were expansions. Leases signed were from the financial, legal, real estate and tech sectors. Manulife US REIT’s portfolio remained resilient – no increase in subletting within their assets, and no request from tenants to right-size/downsize or relocate thus far.
  • Manulife US REIT’s long WALE of 5.7 years translates to low lease expiries of 3.5%/6.1% by GRI for FY20/21. Modest, single-digit rental reversions are still attainable as rents expiring in FY20/21 are 2% to 19% under comparable market rents. Tenants are locked in by leases, which do not have break clauses written in.
  • While asking rates have remained stable, softer leasing activity is expected in this weaker economic environment, which may lead to more tenant incentives being offered to retain/attract tenants.

Only 0.3% of rental waivers and 0.3% of deferment provided, based on 1H20’s GRI.

  • Little rental support was required due to the quality/resilience of tenants – waivers and deferments were offered mainly to the F&B tenants. Manulife US REIT’s portfolio is anchored by the Legal (22.0%) and Finance and Insurance (19.9%) sectors which have been one of the more resilient sectors throughout the COVID-19 pandemic.
  • Manulife US REIT’s Top 10 tenants (excluding Finance and Legal), account for 24.2% of GRI and are mostly listed companies, government entities and/or use the premise as headquarters.


The Negatives


Deterioration of rent collection.

  • We note that rent collection has been on the downtrend, deteriorating from 99% in April and 97% in May, to 93% in June. Management commented that rents are still being collected, although tenants are taking a longer time to make payment.

Portfolio valuations fell 2.9%, pushing gearing up from 37.7% to 39.1%.

  • Asset valuations deteriorated by -1.9 to -4.7%, averaging -2.9% on a portfolio level, largely due to lower rental growth assumptions used by valuers. As a mathematical consequence, gearing edged up to 39.1%.


Outlook

  • While leasing activity remains weak, we remain optimistic on Manulife US REIT’s resilience due to its long WALE, low expiries in FY20/21, tenant quality and tight comparable supply in the markets that Manulife US REIT has a presence in. Cautious business sentiment has led to the deferment of major leasing decisions (relocations) resulting in more renewals.
  • We also expect the densification trend to pause due to social distancing measures, hence providing support for leasing demand. Additionally, statistics for office-using sectors show that these sectors (Finance and Insurance, Legal, Professional Services and Tech) remains the most resilient amongst the sectors.


Maintain BUY on Manulife US REIT with a higher Target Price of US$0.90 (previously US$0.80).






Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 UP 0.800



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