Manulife US REIT - A Pure-Play On The Rebounding US economy
- Manulife US REIT (MUST) is the only listed REIT in Asia offering the best proxy to the rebounding US economy and strengthening USD via its three freehold office properties. The REIT offers a superior FY17F yield of 7.7%, which is at a healthy 100bps above its Singapore peers.
- The leases also have inbuilt rent escalation clauses averaging 3% pa, providing strong visibility on DPU growth.
- Maintain BUY with a TP of USD0.96.
Beneficiary of a rebounding US economy.
- Manulife US REIT (MUST) is the first and only listed US office REIT in Asia. It offers the best proxy for investors looking to benefit from a rebounding US economy and stable USD exposure.
- Its portfolio comprises three well-located US freehold office properties with a total value of USD813.2m.
A hedge against Fed rate hikes.
- While the US Fed Funds rate hike generally has a negative impact on yield instruments like REITs, we believe the impact on MUST may be mitigated, as it would coincide with a pick-up in the US economy and office demand. The rate hike would also result in the strengthening of the USD, benefitting Asian investors.
- In addition, MUST refinanced its IPO bridge loan facility (Jul 2016) to a 4-year fixed-term loan at a lower interest cost of 2.46%, thereby shielding it from higher borrowing costs.
Rental escalations of 3% pa vs fixed leases in Singapore.
- About 85% of its portfolio leases have inbuilt rent escalation clauses averaging 3% pa, with the remaining 15% under periodic rental reviews. This provides clear visibility of DPU growth.
- Also, rental upsides from measurement standard changes (Building Owners and Managers Association (BOMA) 2010) and AEIs offer scope for more upside.
Inorganic growth ability from strong sponsor pipeline.
- Its sponsor, Manulife group, has total assets under management (AUM) of USD718bn. Of this, its US office assets account for > USD6bn, providing a strong acquisitions pipeline.
- Also, the depth of the US market offers scope for third-party acquisitions. Its gearing remains modest, at 34.7%.
- Near-term acquisitions are expected to be smaller-sized (USD100-150m) and geographically-diversified. It targets to acquire one asset a year.
Long WALE and excellent tenant profile.
- It has a 97% portfolio average occupancy rate, with a long WALE of 6.1 years. Less than 7% of leases by NLA are due for expiry over the next two years.
Maintain BUY with a TP of USD0.96.
- Our TP is based on a 5-year DDM model (COE: 8.5%, TG: 2%).
- MUST offers high FY17F-18F dividend yields of 7.7% and 7.9% respectively, a good 100bps above the office SREITs average.
- Key risks are the ability to retain its key office tenants, changes to the underlying tax-efficient structure, and the US economy falling into a recession.