In this briefing:
1. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions
Manulife Us Reit (MUST SP) announced a 3.6% year-on-year (y-o-y) growth in adjusted DPU to 6.05 US cents for financial year ended 31 December 2018 (FY18). Net property income (NPI) for FY18 grew 55.4% y-o-y to US$90.7mn, beating our forecast by 15%. Distributable income grew 51.9% y-o-y to US$71.0mn, mainly due to contributions from the four office properties acquired in 2017 (Plaza and Exchange in New Jersey) and 2018 (Penn in Washington D.C. and Phipps in Atlanta). The 2H18 distribution of 3.04 US cents per unit will be paid on 29 March 2019. The book closure date is 19 February 2019.
Strong occupancy rate and rental escalation continue to support organic growth
MUST continued to maintain high portfolio occupancy rate of 96.7% and long weighted average lease expiry (WALE) by net lettable area (NLA) of 5.8 years. Leases signed in FY18 resulted in positive rental reversions of 8.9%. Moving forward, the leases expiring in 2019 are minimal while 60.7% of the portfolio’s leases by NLA will only expire in 2023 and beyond. As the majority of MUST’s leases by gross rental income have rental escalations averaging 2.5% p.a., MUST’s gross revenue will continue to enjoy stable organic growth. In addition, MUST’s properties are Class A and Trophy assets in cities where future supply are limited. Majority of its properties have passing rents below market rents, which further supports organic rental growth.
Potential acquisitions remain as key catalysts
MUST’s balance sheet remains strong (aggregate leverage at 37.2%) and it has additional debt headroom of about US$209mn before hitting the maximum regulatory gearing limit of 45%. As its unit price had rebounded from a low in 4Q18, the discount to net asset value (NAV) was removed. Currently trading at about 1.07x P/NAV, MUST may see greater opportunities for potential yield-accretive acquisitions.
Proposed US Tax Act, 267A Regulations no material impact
The 267A Regulations are still in proposed form but the manager expects that the proposed regulations and the proposed Bardados tax changes will not have any material impact on the net tangible asset (NTA) and DPU of MUST.
Maintain “Buy” with fair value of US$1.04/unit
Valuations remain attractive with FY19F and FY20F yield of 7.1% and 7.2%. From its lowest point of 69.5 US cents in 4Q18, MUST’s unit price had rebounded about 23%, outperforming the FTSE ST Real Estate Investment Trusts Index. We maintain our BUY recommendation with a higher fair value of US$1.04, implying a 21% upside from the current price (coverage initiated on 16 Nov 2018). Reversing from a position of discount to net asset value to the current 1.07x P/NAV, , MUST may see greater opportunities in making yield-accretive acquisitions. Fair value is derived based on the dividend discount model with a required rate of return of 9% (using U.S. 10-year risk free rate of 2.64%) and a terminal growth rate of 1.5%.
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