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Simons Trading Research

Author: simonsg   |   Latest post: Mon, 30 Mar 2020, 8:48 AM

 

Manulife US REIT - Well Prepared for Turbulent Times; Keep BUY

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  • Despite headwinds from COVID-19 outbreak to the US economy, we believe Manulife US REIT (SGX:BTOU)'s office portfolio will be able to weather the crisis due to its diversified and good quality assets, strong tenant profile, and long WALE (5.7years).
  • Balance sheet remains strong with modest gearing and spread out debt to maturity.
  • Key risks are potential right sizing/downsizing by tenants, collapse of co-working office players and a prolonged economic recession in the US.

Operational Updates

  • Management updated during investor call that it hasn’t seen any increase in rental arrears or defaults and tenants are contractually obligated to pay full rents despite business disruptions. Tenants also do not have the option to break their leases citing the COVID-19 outbreak. Only retail tenants (accounting only 1% of total) have seen the biggest hit and management is currently exploring possible ways of helping them.
  • Due to a current lockdown, most of the tenants allow their employees to work from home and, as a result, the physical occupancy at most of its buildings is currently 20%. As a result management also began to reduce the operational staff at its assets.
  • Manulife US REIT mentioned the occupancy for its buildings has remained resilient during the GFC crisis ( > 85%) as Class A buildings generally tend to be more resilient in market down cycles.

Long WALE Mitigates Potential Short-term Pressures

  • Manulife US REIT’s current weighted average lease expiry (WALE) stands at 5.7 years which is among the highest in office REITs. In FY20F-21F, only 4% and 7% of leases are due for renewal. YTD, Manulife US REIT has executed 138,000 sqf of leases (2.9% of the portfolio by NLA) with tenures averaging 7.8 years and rental reversions of +8.1%, citing strong momentum before outbreak.
  • However owing to current market conditions management expects leasing momentum to take a pause until some clarity emerges.

No Debt Refinancing Concerns

  • Gearing remains modest at 37.7% and asset values have to fall by more than 16% to cause a breach in S-REIT regulation. About 10%/27% of its total debt is maturing in FY20/21F.
  • Management has sufficient funding lines available to refinance loan maturing in FY20 and plans to refinance this at trust level thus unencumbering its assets.
  • In the worst case even if liquidity dries up, the expiring loans also have an option to be extended by another year.

Risk of Key Tenant Default Remains Low

  • We lower our FY20-22F DPU 3-5% factoring in lower rent growth and occupancy and raised COE by 100 bps to 8.6% to account for the risk.
  • Maintain BUY, with a lower Target Price of USD 0.88 from USD 1.12, 26% upside with 9% yield.
  • Manulife US REIT’s top 10 tenants (35% of rental income) are mostly MNCs and government agencies, most of whom have their headquarters or key operations based out of its assets. Tenant trade sector also remains well diversified with no sectors accounting for > 23% of rental income.

Source: RHB Invest Research - 25 Mar 2020

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