Site Visits to Four US Properties

• Our visits to Manulife US REIT (SGX:BTOU)’s properties in Atlanta and New Jersey, and meetings with US-based property brokers reaffirm our positive view on its DPU growth profile. We see clear strengths in its well-placed assets and solid lease management and AEI know-how.
• We continue to favour Manulife US REIT for its DPU visibility supported by stable income growth and low leasing risks. We have kept forecasts and DDM-based Target Price intact at USD1.00 (COE: 7.7%, LTG: 2.0%).
• Manulife US REIT’s valuation remains compelling with DPU yields of 6.9- 7.2% FY19-20E vs 4.6-5.7% offered by its office S-REIT peers. Post its Centerpointe deal, low 36.8% gearing should support acquisition growth opportunities and DPU upside. See Manulife US REIT's dividend history.
• BUY.

Strong Assets – Location, Amenities to Support Yields

• Manulife US REIT (SGX:BTOU) owns eight commercial buildings in the US with a combined value of USD1.9b and NLA of 4.2m sf. This would include the USD122.0m acquisition of its second Washington DC asset - Centerpointe in Fairfax County, Virginia that was announced on 29 Apr 2019. All its buildings are on freehold land and classified as either Class A or Trophy properties.
• We visited four properties within Manulife US REIT’s portfolio - Peachtree and Phipps, both in Atlanta, Georgia, and Plaza and Exchange both in the city of New Jersey. They would in aggregate have contributed to 50.0% of Manulife US REIT’s AUM as of end-Dec 2018, and 60.0% of its total NLA.
• We believe the four properties, like its other assets, are located in cities with strong demand-growth fundamentals. Asset-level occupancies for these have ranged from between 97.7% to 100.0% as of end-Mar 2019, higher than its 97.4% portfolio occupancy. Vacancies are also lower than 9.2-18.0% for their respective submarkets. We expect occupancies to be well-supported by limited new supply in its micro-markets in 2019-20.
• All assets are equipped with on-site amenities including conference and fitness centres, cafeterias, and reserved car parks.
  • Peachtree in Midtown Atlanta has F&B tenancies – a high-end restaurant and popular bistro, while Phipps lies buffered within the expanding and upmarket Buckhead retail belt.
  • Its New Jersey assets meanwhile command prime locations within their respective micro-markets. Plaza in Secaucus is located within the 550-acre mixed-used amenity of Harmon Meadow.
  • Exchange sits along the Hudson River Waterfront amongst other high-specs office properties and is the most accessible property within its micro-market to the Exchange Place station which runs to World Trade Center in Manhattan.
• Manulife US REIT's property leasing teams have been proactive against rising competition. These include planned AEIs - works at Exchange are on track to complete in 4Q19/1Q20. Other fit-out contributions as part of tenant incentives would include
  1. creating shared spaces, often at the lobby area,
  2. setting up cafeterias or offering other F&B options, including mobile food trucks, and
  3. opening on-site fitness centres and conference facilities.
• While Manulife US REIT boasts long 6.0 year WALE (by NLA), we see its assets as well-placed and for rents to rise by up to 3-5% in 2019-20E on tight supply, especially in the Atlanta submarkets.

Atlanta and New Jersey – A Tale of 2 Cities

• Strong US macro-economic fundamentals have kept its office sector on an expansionary mode with the net absorption in many of its key cities matching rising new supply. Our meetings with property brokers suggest long-term growth prospects for Atlanta, as continued population and job growth supports occupancies and rents, albeit at a moderating pace in 2019.
• While the New Jersey market remains competitive, Manulife US REIT’s assets are best-in-class on location – Exchange should see yields rise post-AEI. Leasing activity has and will likely be led by co-working, technology and finance sector tenants.
• We believe strong leasing management know-how will remain key to DPU growth. This, coupled with proactive AEI – a recurring theme throughout a total of eleven properties we visited across six US cities, will help drive stronger rental growth prospects.

US Office Submarket Outlook - Atlanta

• The Atlanta economy has continued to expand in 1Q19, with 2.1% y-o-y in jobs growth and ahead of a +1.0% y-o-y nationwide, with the market’s 3.6% unemployment rate remaining below the 3.8% national rate. According to Cushman & Wakefield (C&W), the majority of office demand growth has been in the CBD (Midtown, Buckhead, and Downtown), with their rents rising faster relative to the suburban market. In particular, Class A office absorption at about 374k sf was stronger than in any individual quarter in 2018.
• We expect the Atlanta market to remain strong into 2019, as evident by 30.0% pre-commitment and strong leasing momentum for office construction. C&W estimates 4.1m sf in office space under construction, with a-quarter to come online in 2019.

Broad trends are favourable – vacancy at historical lows

• Atlanta, together with Raleigh-Durham, Charlotte, and Nashville - cities throughout the US Southeast - have witnessed between 41-61% population growth rates over 2000-18, driven by rising domestic migration inflows. C&W estimates this could increase at a 1.9% CAGR to 6.7m from 2018 to 2025. As such, its 10- year office-using employment growth, which has averaged 20.0% p.a. between 2009-2018, is forecast to increase at 20-25% p.a. between 2019-22E, above the 15-20% p.a. for the national average.
• Office vacancies in Atlanta declined q-o-q from 16.2% to 16.0% in 1Q19, a sixth-quarter since 3Q17 that vacancy has fallen below its 16.7% five-year average. This was led by stronger occupancies in the CBD, which rose q-o-q from 84.9% to 86.1%. Vacancy in the CBD submarkets is the lowest since 4Q 2005, but could rise slightly on the new upcoming supply.

Rental growth strong; should moderate in 2019

• As a result of rising replacement costs set to accelerate to 5.5% from 2019-2030.

Growth led by co-working tenants, professional services

• Co-leasing tenants, primarily WeWork will continue to finance, technology and professional services.

US Office Sector Outlook – New Jersey

• New Jersey remains below modernised facilities; many, including Manulife US REIT have initiated AEIs. Looking ahead, C&W expects downward pressure on vacancies to be supported by smaller-sized deals.

Hudson Waterfront – AEIs against supply availability

• The Hudson Waterfront submarket comprises back offices (52.0% of more than 1.0m sf in leasing activity in 2018), given its proximity to NYC. C&W expects that asking rents for Class A space should remain near historical levels.

Meadowlands – rents supported by low vacancies

• With declining office vacancies in the Hudson rents for Class A in 1Q19 were USD28.00 psf, or SGD5.30 psf below North New Jersey average rents.

Rental growth likely muted

• The Hudson Waterfront and vacancy in the Hudson Waterfront likely remaining above 15.0% barring a market-moving deal, but will also slowly tick downwards.

Source: Maybank Kim Eng Research - 29 May 2019