Manulife US REIT started at 'buy' by Maybank on strong US fundamentals

SINGAPORE (Mar 25): Manulife US REIT (MUST), with seven high-quality freehold US office assets, is proxy to favourable US macro-economic fundamentals, says Maybank KimEng.

DPU visibility is also supported by stable income growth and low leasing risks, says Maybank, with 94% of its leases having rental escalations; a long WALE and a diversified tenant base.

“We initiate coverage with ‘buy’ and a DDM-based target price of US$1.00,” says Maybank in a Monday report, adding that key risks include adverse changes to its US REIT status; changes to tax regimes; and a slower US office sector outlook.

MUST’s WALE is a relatively long 5.8 years by NLA with lease expiries well spread, longer than the 3-4 years for Singapore offices and one of the highest among S-REITs. In addition, MUST offers 6.9-7.1% FY19-20E DPU yields vs 4.6-6.6% promised by its office S-REIT peers, says Maybank.

MUST’s portfolio occupancy is also a high 96.7% and Maybank sees 2.0-3.5% DPU growth starting FY20E.

“About 55% of its leases are embedded with fixed rental escalations averaging 2.5% pa; another 39% are under mid-term or periodic rental increases,” says Maybank.

While net absorption has been robust owing to a strong US economic recovery and rising new supply, MUST’s assets are well-placed in cities with firm demand-growth prospects.

“We see rents rising by up to 5-10% in 2019-20E on tight supply,” says Maybank.

To be sure, four acquisitions completed since its May 2016 IPO have boosted its AUM by 124% to US$1.7 billion ($2.3 billion) at end-Dec 2018.

Gearing has risen steadily to fund deals but remains at a comfortable 37.2%, implying US$260 million in debt headroom.

“We expect acquisitions to provide upside to DPUs. Sponsor Manulife has a strong deal pipeline of real-estate assets concentrated in the US,” says Maybank.

Lastly, tax structure is expected be intact based on proposed US S267A regulations and management is exploring the possibility of reverting to its original IPO form following confirmed regulations by 1H19. This could result in 1.5% of additional tax savings, plus upside to its DPU forecast, says Maybank.

As at 10.39am, units in MUST are down 1 cent at 86 cents or FY21E yield of 7.3%.