MANULIFE US REIT (SGX:BTOU)
Manulife US REIT - Banking On High Quality Assets; Keep BUY
- Keep BUY with unchanged target price of USD0.90, 22% upside and c.8% yield.
- Manulife US REIT’s 3Q update showed a slight decline in portfolio occupancy as leasing demand stayed weak in light of COVID-19. We remain confident that Manulife US REIT’s high quality and well diversified office assets backed by a strong tenant base will weather the crisis.
- Manulife US REIT's valuations are attractive 1x P/BV and a FY21F yield of 8.4%, c.300bps higher than the average yield for the S-REIT sector.
Slight occupancy decline; Minimal lease expiries until 2021.
- Manulife US REIT (SGX:BTOU)'s portfolio occupancy declined 1.9ppt q-o-q to 94.3%, largely due to known expiries unrelated to COVID-19 and a slowdown in leasing demand.
- Year-to-date up to September, Manulife US REIT has signed c.217,300 sqft of leases (no new leases signed in 3Q) at +7.9% rent reversion. Looking ahead, only 1.9%/6.7% of leases (by gross rental income) are due for renewal in 4Q20/2021 mainly across Michelson, Capitol and Figueroa. Management is currently in early negotiations with tenants and expects majority of these leases to be renewed. With limited competing supply in its submarket and average portfolio rents (excluding Michelson) still 6% below market, it expects rent reversion to stay positive in low single digits.
- Physical occupancy at Manulife US REIT's office buildings remains low at c.15% but is a slight improvement from 2Q (c.10%). Rent collection stands healthy at 98% year-to-date (3Q: 94%) with slow collections mainly from food & beverage (F&B), lifestyle and retail tenants. Year-to-date, Manulife US REIT has provided rental deferment of 0.3% and rent abatement of 0.2%.
Minimal impact from the US elections.
- Management expects limited impact to its portfolio from US elections and possible changes in Government and sees no imminent risk to its existing tax-efficient structure.
Expect interest cost savings.
- Manulife US REIT has a USD223.7m amount due for refinancing in 2021. As these loans were secured in 2017-2018 we expect interest cost savings of 30-60bps upon refinancing. Earlier this year Manulife US REIT secured a maiden USD100m, 5-year green loan, to refinance its Peachtree asset at 1.85% pa vs a portfolio weighted average interest cost of 3.26%.
- Asset enhancements at Figueroa and Exchange have been completed pushing the gearing to 39.9% (from 39.1%) but still well below the 50% limit. Management sees limited distress opportunities in the market as sellers remain tight and cap rates have remained steady.
- Management remains on the lookout for good opportunities with aim to further diversify its tenant base into growth sectors like technology and healthcare.
Valuations unlikely to see major decline.
- Manulife US REIT conducted a revaluation of its assets in June which resulted in a 3% decline in portfolio value mainly on the back of assumptions for lower rent growth and vacancy changes.
- We do not expect any further large decline in Manulife US REIT's asset values (likely 0 to -2%) barring a prolonged COVID-19 pandemic (beyond 2H21).
- 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.
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-11-06
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