Manulife US REIT - CGS-CIMB Research 2021-02-08: Impacted By Provisions

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Impacted By Provisions

Manulife US REIT's 2H/FY20 DPU of US$0.0259/US$0.0564 below expectations at 42.3%/92.1% of our FY20F forecast.
Adopting a proactive leasing strategy with minimal lease expiries of 5.8% in FY21F.
Reiterate ADD with a lower DDM-based target price of US$1.00.

Manulife US REIT (SGX:BTOU) posted a 1.2% y-o-y increase in 2H20 gross revenue to US$95.7m but NPI fell 8.2% y-o-y to US$53.7m due to lower rental income from Michelson and Peachtree, reduced portfolio carpark income and provision for expected credit losses from its retail and F&B tenants of US$3.6m, partly offset by contributions from Capitol acquired in 2019.
Manulife US REIT's 2H/FY20 DPU came in at US$0.0259/US$0.0564, -11.3%/-5.4% y-o-y, respectively. See Manulife US REIT's dividend history.
Excluding provision for credit losses and loss in carpark income, Manulife US REIT would have reported a y-o-y higher DPU for FY20. Manulife US REIT revalued its portfolio in 2H20 and recorded a 2% h-o-h portfolio valuation deficit.

Manulife US REIT's portfolio occupancy was lower q-o-q at 93.4% at end-FY20. The trust renewed/leased ~279k sqft of space in FY20 and achieved positive rental reversions of 0.1%. Excluding a mark-to-market lease, portfolio reversion would have been +4.7%. Demand came mainly from the legal, real estate, information, finance and insurance sectors.
Rental collections have remained strong, with an average 97% of rents collected, as at Jan 2021. Manulife US REIT provided for rent deferment of 0.6% and abatement of 0.5% of gross rental income as at end-FY20.
Manulife US REIT indicated that post-end-FY20 results, it has reached an agreement with the retail tenant to settle its arrears.
Looking ahead, Manulife US REIT has 5.8%/17.8% of portfolio gross rental income to be renewed in FY21F/22F and expects to achieve a modest positive reversion when these leases are re-contracted; it will also look to boost occupancy with flexible leasing options.

Manulife US REIT indicated that as part of its strategy to enhance growth prospects, it is looking to boost its tenant exposure in high-growth sectors such as healthcare and tech, as well as business parks segments, to at least 20%, via joint ventures or acquisitions.
With a gearing of 41% as at end-FY20, Manulife US REIT has debt headroom of ~US$375m before reaching the limit of 50%, in our view.
On debt refinancing, Manulife US REIT is in advanced negotiations for sustainability-linked loans to refinance its FY21 debt expiries and anticipates enjoying interest cost savings when the refinancing exercise is completed.

We tweak our Manulife US REIT's FY21-22F DPU estimates down by 0.84-2.82% on slower rental reversion outlook and lower portfolio occupancy. Accordingly, our DDM-based target price is reduced to US$1.00.
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.
We continue to like Manulife US REIT for its resilient portfolio, with 96% of its leases by gross rental income having inbuilt rental escalations. Manulife US REIT's share price had underperformed in recent months and at the present projected FY21F DPU yield of ~8.6%, we believe the stock price is likely to have priced in near-term leasing risks.
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 2021-02-08

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