In Line, Growth Fundamentals Intact

• MANULIFE US REIT (SGX:BTOU)’s 4Q19 DPU was down 5.9% y-o-y as its unit base rose 6.5% y-o-y due to the Capitol asset acquisition and was in line with MKE/consensus’ estimates.
• We kept DPU forecasts mostly unchanged and rolled forward our DDM-based target price of SGD1.15.
• Valuation remains compelling at 5.9% FY20 DPU yield vs 4.5-6.0% offered by its office S-REIT peers, backed by high DPU visibility with stable income growth and low leasing risks. We see DPU upside with low 37.7% leverage supporting further acquisition opportunities.
• Maintain BUY.

Lower Occupancies; Leasing Activity Strong

• Manulife US REIT's 4Q19 revenue and NPI rose 20.4% y-o-y and 18.9% y-o-y with earlier acquisitions – Centerpointe since May 2019 and Capitol since Oct 2019. Its portfolio occupancy dipped from 97.3% to 95.8% q-o-q, mainly due to Mchelson (from 96.0% to 90.1%) and Exchange (97.7% to 95.8%).
• Leasing activity improved at 52k sf (from 32k sf in 3Q19) and gained traction in Jan 2020, with 70k sf leased/renewed at Plaza, Peachtree and Figueroa. This lifted committed occupancy to 96.4%. Its assets all mostly trade at 5-10% below market rents, except for Michelson. We expect both its occupancies and rents to be supported with limited new supply in each sub-market.

Long WALE, Low Leasing Risk

• Its WALE was lower at 5.9 years (from 6.2 years), with 54.4% of its leases by NLA expiring in 2025 and beyond. WALE for its top 10 tenants at 34.6% of its gross rental income was higher at 6.7 years (from 39.8% at 6.9 years as of end-Sep 2019) while its co-working tenancies comprised about 2.0% of gross rental income.

Strong Balance Sheet, Further Deal Upside

• Leverage has risen to fund six acquisitions since its 2016 IPO but remains at a comfortable 37.7%, which suggests almost USD300m in debt headroom.
• We expect acquisitions to provide upside to our DPUs, from its sponsor’s strong deal pipeline of real-estate assets concentrated in the US.

Source: Maybank Kim Eng Research - 5 Feb 2020