• Manulife US REIT's FY19 headline DPU rose 7% y-o-y to 5.96 UScts, in line. Adjusting for private placement/preferential offering, DPU fell 1.3% y-o-y.
• 4Q19 headline DPU decreased 5.9% y-o-y to 1.44 UScts. Adjusted 4Q19 DPU fell 4.6% y-o-y to 1.46 UScts.
• Operationally stable; occupancy stable except Michelson; rental reversion was +0.5% (+12.1% ex-Michelson); < 10% of leases expiring in FY2020/FY2021.
• Maintain BUY; Target Price SGD1.15.

FY19 DPU of 5.96 UScts in Line With Expectations

• Manulife US REIT (SGX:BTOU)’s headline 4Q19 DPU fell 5.9% y-o-y to 1.44 UScts. After adjusting for the impact of the private placement/preferential offering in both 4Q19 and 4Q18, 4Q19 DPU fell 4.6% y-o-y to 1.46 UScts.
• For FY19, headline DPU grew 7% y-o-y to 5.96 UScts, in line with expectations. Adjusted FY19 DPU fell 1.3% y-o-y.
• 4Q19 gross revenue and net property income rose 20.4% and 18.9% y-o-y to US$48.8m and US$30.3m respectively. Similarly, FY19 gross revenue and net property income grew 23% and 22.2% y-o-y to US$177.9m and US$110.8m respectively. The growth was led by acquisitions of Centerpointe and Capitol in FY19 and full-year contributions from Penn and Phipps (acquired in mid-2018).
• Excluding the impact of acquisitions, 4Q19 NPI fell 1.6% y-o-y while FY19 NPI fell 1.1% y-o-y largely due to Michelson (4Q19 NPI -15.7% y-o-y; FY19 NPI -6.4% y-o-y) and Exchange (4Q19 NPI -5.5% y-o-y; FY19 NPI -0.5% y-o-y).
• Finance expenses rose 23.8% y-o-y in 4Q19 due to higher debt to part fund the acquisitions while the Figueroa mortgage loan was refinanced at a higher rate coupled with additional borrowings to fund the acquisitions of Centerpointe and Capitol, capex and leasing costs.
• The manager also reported a fair value loss on investment properties of US$13.5m in FY19 due to capex expenditures and leasing cost increasing more than the change in fair values.
• Manulife US REIT has been included in the FTSE EPRA Nareit Global Developed Asia Index effective 23 December 2019.

Gearing Inched Back Up to 37.7% While Cost of Debt Fell Marginally Q-o-q to 3.37% Post Acquisition of Capitol

• Gearing has inched up to 37.7% from 36.3% as of end- September 2019 post acquisition of Capitol, as expected.
• Weighted average cost of debt fell marginally q-o-q to 3.37% vs 3.43% in 3Q19 post acquisition of Capitol, as expected.
• There are US$72m (9% of total borrowings) property-level mortgages expiring in FY2020, relating to Peachtree at 2.5% interest cost. As rates have remained low, management expects to refinance these loans at below 3% interest cost.

Operationally Stable Except Michelson Which Saw Occupancy Fall to 90%

• Overall portfolio occupancy was relatively stable at 95.8% vs 97.3% in 3Q19 and 96.7% in 4Q18. Including leases signed in January 2020 (70,000 sqft mainly in Plaza and Peachtree), portfolio occupancy inches up to 96.4%.
• Occupancy at Michelson fell to 90.1% vs 96% in 3Q19 and 4Q19 while the rest remain relatively stable. Peachtree’s occupancy fell to 95% in 4Q19 vs 99.4% in 3Q19 but including the leases signed in January 2020, Peachtree’s occupancy will be 99%.
• In FY19, Manulife US REIT renewed 445,000 sqft of leases (9.5% of portfolio NLA) with long WALE of 7.9 years. Overall rental reversions rose 0.5%. Excluding the marked-to-market lease in Michelson, rental reversions increased 12.1%, possibly from Plaza and Peachtree where rents are still below average market rents.
• The leases expiring in FY2020/FY2021 are less than 10% of gross rental income (GRI). Post the forward renewals in January 2020, only leases contributing 5.2% and 7.2% of GRI will be expiring in FY2020F and FY2021F respectively. There are no major leases expiring in FY2020.

Rising ESG – GRESB Score to 93 in FY2019

• Given the increasing interests in ESG investments, Manulife US REIT highlighted that its ESG – GRESB Score was 93 in FY2019, increasing from 76 in FY2017, and ranks third out of 12 listed US office REITs and 22nd out of 212 offices globally.
• Manulife US REIT commits to improving its ESG score and aims to achieve some “green” certification for buildings that have yet to receive any certification. The Penn building is currently undergoing LEED certification.

Outlook

• Management continues to expect positive rental reversions for most of its properties especially the Atlanta market where rental reversions could remain at high single-digit or low double-digit levels.
• For the Michelson building, there are no large leases expiring in the medium term. As such, do not expect the decline in occupancy to continue. However, the re-base of marked-to-market rents may see continued negative rental reversions as the building is 5-10% over the market transaction levels. While the manager is confident that Michelson can continue to maintain this premium, rental reversionary prospects are likely to be more modest. In addition, the manager expects to be able to backfill the vacancy soon.
• Management continues to look for acquisition opportunities. Being mindful that this year is an election year, management believes in its diversification strategy rather than focusing on a specific sector.

Maintain BUY

• We maintain our BUY call on Manulife US REIT and raised our target price to SGD1.15, factoring in a US$250m acquisition in FY2021F.
• Manulife US REIT is now on a better playing field post index inclusion in the FTSE EPRA Nareit Developed Asia Index where it will likely herald a virtuous cycle of greater investor visibility. To this end, we have already seen higher trading liquidity and yield compression of the stock. We believe that investors will look towards a consistent delivery of DPU growth both organically and inorganically. Being the largest and the first US office S- REIT, we believe it will remain attractive.

Source: DBS Research - 6 Feb 2020