Manulife US REIT - CGS-CIMB Research 2020-11-05: Still Going Strong

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Still Going Strong

In 3Q20, Manulife US REIT (SGX:BTOU)’s portfolio operating performance was relatively stable with portfolio occupancy of 94.3% at end-3Q20 and a long weighted average lease expiry (WALE) of 5.5 years. year-to-date Sep 2020, it had renewed 217.3k sq ft of leases at a 7.9% positive rental reversion with demand coming from legal, finance and insurance and real estate tenants.
Manulife US REIT's balance sheet metrics remain strong with gearing of 39.9% at end-3Q and undrawn committed credit facilities of US$134.5m.

While portfolio occupancy dipped slightly on a q-o-q basis, management indicated that these are due to known expiries unrelated to COVID-19 and a slow leasing environment. Manulife US REIT has remaining 1.9% of gross rental income to be renewed in 4Q20F and another 17.4% due in FY21F. These are largely from Capitol, Figueroa and Michelson buildings, coming from tenants in the legal, finance and insurance and advertising segments.
Portfolio rents remain slightly below market and management indicated it expects to lease/renew at largely flat reversions. Rental collections have remained strong, with an average 94% of rents collected in 3Q20 (98% year-to-date). Manulife US REIT provided for rent deferment of 0.3% and abatement of 0.2% of gross rental income at end-3Q20.

Gearing stood at 39.9% at end-3Q20, while interest coverage ratio was at 3.7x. Average debt cost is at 3.21% at end-3Q20. Manulife US REIT has started negotiations for US$223.7m of loans due in 2021. Management indicated that interest cost for these loans average 3.2% while it managed to secure a 5-year US$100m maiden green loan in May 2020 to refinance the Peachtree property at 1.85%.
We anticipate interest cost savings when the 2021 loans are refinanced. In terms of inorganic growth prospects, management indicated it would likely continue to look for opportunities. According to management, transaction activity continued to be subdued, while enquiries have picked up a little q-o-q.

We reiterate our ADD rating with a DDM-based Target Price of US$1.05. We continue to like Manulife US REIT for its resilient portfolio, with 60% of its tenants from the finance, legal, tech, and healthcare sectors as well as the government, and 96% of its leases by gross rental income having inbuilt rental escalations.
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 space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-05

SGX Stock Analyst Report ADD MAINTAIN ADD 1.050 SAME 1.050