• Maintain BUY, with an unchanged USD0.98 Target Price, 10% upside plus 7% FY20F yield.
• MANULIFE US REIT (SGX:BTOU)'s 2Q results were in-line. The outlook for the US office market remains favourable, with positive demand-supply dynamics and we see Manulife US REIT’s high quality office assets as a good proxy to this trend. Organic and inorganic growth are expected from built-in rent escalations and acquisitions.
• Key near-term catalysts are the inclusion in NAREIT index and tax structure rollback.
• Valuations remain attractive with 6.7% yields ( > 150bps office SREIT average) and 1.1x P/BV.
• Manulife US REIT remains our Top Pick for the sector.

Strong Leasing Momentum With Long WALE for Leases Signed

• In 2Q, Manulife US REIT (SGX:BTOU) secured leases for 246,000sqf (1Q: 121,000sqf). Overall the leases signed in 1H19 have a long WALE of 8.6 years, a rent escalation of 2.8% pa, and provide good earnings stability and organic growth.
• Overall, rent reversion was 0.3%, dragged down mainly by the marked to market of Michelson’s lease renewals. Excluding Michelson’s leases, management noted that rent reversions were healthy in low double-digits.
• Overall occupancy remained relatively stable at 97.2% (1Q: 97.4%). Only 2.3%/7.7% of leases by gross rents are due for renewal in FY19-20F for which we expect mid to single digit rent reversions.
• Management noted that its assets are still 5-10% below market rents (except Michelson).

US Office Dynamics Remain Positive

• In the US, GDP during 2Q grew 2.1% beating consensus expectations, with unemployment rate decreasing 0.1% q-o-q to 3.7% based on official data. Strong job numbers indicate that hiring activity remains resilient for now, despite trade tensions. Overall office vacancy in the US decreased slightly to 14.5% at the end of 2Q with co-working, technology, finance and insurance being key demand drivers according to research by JLL.
• 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%. The supply outlook in Manulife US REIT’s micro markets also remains limited with high replacement costs limiting future supply growth.

Potential Upside From Tax Structure Rollback and Inclusion in the NAREIT Index

• Manulife US REIT is currently awaiting the finalisation of proposed US tax regulations post which the REIT should be able to roll back to its IPO tax structure, avoiding the need for a Barbados entity, which could result in additional tax savings of 1.5%.
• In addition, post recent acquisitions, Manulife US REIT is also close to meeting the criteria (ie free float and liquidity) for inclusion into the NAREIT Index. The inclusion would be a positive re-rating catalyst in our view as it will further increase liquidity and widen investor base.

Source: RHB Invest Research - 15 Aug 2019