• Stay BUY with a higher USD0.98 Target Price from USD0.96, 11% upside with 7% FY20F yield.
• Our recent visit to some Manulife US REIT (SGX:BTOU) assets reaffirms that they stand apart from the crowd. Given favourable market conditions and flight to quality acting as tailwinds, we expect the positive rent reversions to continue.
• Valuations are relatively attractive: 6.8% yields ( > 160bps above the office SREIT average) and 1.1x P/BV. See Manulife US REIT's dividend history.

Manulife US REIT’s Key Strengths

• One of MANULIFE US REIT (SGX:BTOU)’s key strengths, in our view, is its strong asset quality, as they are well-connected with amenities surrounding them. From our discussions with consultants, we understand that this has been the topmost consideration for businesses leasing office spaces, so as to employ and retain a high-quality workforce in the current strong job market conditions.
• JLL’s latest office report (1Q19) also highlights flight to quality as a key trend over the last two years. The above is reflected in Manulife US REIT’s operating performance, with portfolio occupancy steadily increasing to 97.4% – well above the market average – along with high single-digit positive rent reversions.
• The early extension of Hyundai Capital America’s lease (~97,000sqf) in Jan 2019 for another 11 years adds another testimony to tenants’ preference for Manulife US REIT’s assets.

Market Fundamentals Remain Strong

• The strong job (June) in the US hiring remains for trade tensions. In 1Q1, activity accounted 40% leasing, led tenants from the finance, technology, and JLL’s research.
• Manulife US REIT’s portfolio also benefitted from this trend, with one of Peachtree’s co-working tenants expanding its current office space by 50%. Other supportive factors include high replacement costs, especially in markets like Atlanta, which has limited new supply growth. With average rent (except Michelson) still 5-10% below market, we see room for upsides.

Upsides Ahead From Tax Structure Rollback and Inclusion in the NAREIT Index

• Manulife US REIT is currently the finalisation proposed US tax regulations (Dec 2018) that expected to soon. Based on the proposed regulations, the REIT should be able to roll back to its IPO tax structure – avoiding the need for a Barbados entity – that is likely to result in additional tax savings of ~2%.
• In addition, post recent acquisitions, Manulife US REIT is also close to meeting the criteria (free float and liquidity) of inclusion into the NAREIT Index. A potential near-term (one year) inclusion will be a positive re-rating catalyst, as it will further increase liquidity and widen the investor base.

Revise FY19-21F DPU 1-2%

• We revise FY19-21F DPU 12% by raising our rent assumptions. We also cut COE assumptions by 10bps by lowering the risk-free rate 503% – to better reflect the current prolonged low interest rate environment.

Source: RHB Invest Research - 12 Jul 2019