Deal Increases DPU Visibility

• MANULIFE US REIT (SGX:BTOU)’s acquisition of Centerpointe in Washington DC is DPU-accretive and should strengthen its overall AUM profile. We see the asset’s strong tenancies and favourable lease structures supporting stable income growth and increasing DPU visibility.
• We revised up DPUs by 0.5% on the higher NPI and new units. Our DDM-based Target Price remains at USD1.00 (COE: 7.7%, LTG: 2.0%).
• Manulife US REIT’s valuation is compelling with DPU yields of 6.8- 7.1% FY19-20E vs 4.6-6.5% offered by its office S-REIT peers. Post-deal, we see further DPU upside with low gearing of 36.8% supporting acquisition opportunities.
• BUY.

Acquires USD122m Centerpointe in Washington DC

• Manulife US REIT has added another asset to its Washington DC portfolio with the USD122m acquisition of Centerpointe in Fairfax County, Virginia at a 7.55% implied cap rate. The property’s key attributes are its:
  1. freehold Class A office specs;
  2. strategic location in a high-density metro area between two prominent retail centres and a 30-minutes drive from Amazon’s upcoming HQ2; and
  3. strong tenancies in supporting its 98.7% occupancy as of end-Mar 2019.

Strong Asset, Extends WALE

• Centerpointe has historically achieved above-market occupancies with its rental rates on average at a 10-25% premium to other properties in its sub-market. The asset is the headquarters for more than half of its 21 tenants (by NLA), which include large IT corporates and a government agency, and will help diversify Manulife US REIT’s tenancy base.
• Importantly, 100% of its leases have embedded rental escalations of 2.5-3.0% p.a. with the 6.9-year WALE to extend Manulife US REIT’s portfolio WALE from 6.0 to 6.1 years.
• Post-deal, 56.1% of Manulife US REIT’s leases are expected to expire from 2024 and onwards, up from 54.8% as of end-Mar 2019.

Post-deal, Slight Lift to DPUs

• Post-deal, Manulife US REIT's AUM rises by 7.0% to USD1.86b, with NLA up 11.2% to 4.2m sf.
• Gearing as expected will remain comfortable at 36.8%, given the 25- 75 debt-equity funding structure; Manulife US REIT on 29 Apr raised USD94.0m in a private placement of 8.9% new units. We expect acquisitions to provide DPU upside, backed by USD101-284m debt headroom and its sponsor’s strong deal pipeline of real-estate assets concentrated in the US.

Source: Maybank Kim Eng Research - 2 May 2019