• Manulife US REIT’s 1H20 DPU of 3.05 UScts, in line, at 49.8% of our FY20F forecast.
• Manulife US REIT enjoyed stable portfolio occupancy in 1H20 and expects to benefit from interest cost savings from debt refinancing starting 2H20.
• Reiterate ADD with an unchanged DDM-based Target Price of US$1.05.

Manulife US REIT's 1H20 Results Highlights

• Manulife US REIT (SGX:BTOU) posted 18.3%/20% y-o-y increases in 1H20 gross revenue/distribution income to US$98.6m/US$48m, thanks to contributions from Centerpointe and Capitol, acquired in 2019, partly offset by lower rental income from Michelson and lower carpark income.
• Manulife US REIT's 1H20 DPU rose 0.3% y-o-y to 3.05 UScts.
• Manulife US REIT revalued its portfolio in 1H20 and recorded a 2.9% portfolio revaluation deficit, lowering its BV/unit to US$0.79.

Stable Portfolio Occupancy, High Rental Collections

• Portfolio occupancy remained fairly stable q-o-q at 96.2% at end-2Q20. The trust renewed/leased 217.3k sqft of space in 1H20 and achieved positive rental reversions of 7.9%. Of this, 50% were renewals and a further 42% were new leases coming from the finance and insurance, legal, real estate and tech sectors.
• Manulife US REIT indicated that all its properties have remained open, with building occupancies at 10-20% at present. It also shared that its rental collections have remained strong, with an average 96% of rents collected in 2Q20. It provided for rent deferment of 0.3% and abatement of 0.3% of gross rental income as at end-2Q20.
• Looking ahead, Manulife US REIT has a remaining 3.5% of portfolio gross rental income due to be renewed in 2HFY20F and a further 6.1% in FY21F.
• Manulife US REIT indicated that its portfolio remains 5-10% under-rented compared to current market rents.

Interest Cost Savings From Loan Refinancing

• Gearing stood at 39.1% at end-2Q20, while interest coverage ratio was at 3.8x. Average debt cost is expected to decline q-o-q to 3.21% by end Jul 2020 post refinancing Peachtree’s loan via a 5-year US$100m maiden green loan. 96.1% of its loans are on fixed rates and Manulife US REIT has undrawn committed facilities of US$134.5m.
• While much have been debated about the current work-from-home (WFH) trends and impact on office demand, Manulife US REIT expects minimal impact on its portfolio due to limited new supply in the foreseeable future, minimal incremental shift in WFH trend given that this trend is already well established in the US, need to de-densify for social distancing and delays in returning to dense gateway CBD offices.
• In terms of inorganic growth prospects, it would likely continue to selectively look for opportunities given that current market transactions have remained relatively quiet.

Reiterate ADD Rating

• We tweak our FY21-22F DPUs up by 0.2% to bake in interest cost savings from the refinancing of Peachtree’s loan. Our DDM-based Target Price is unchanged at US$1.05.
• We continue to like Manulife US REIT for its resilient portfolio, with 60% of its tenants from the finance, legal, tech, and healthcare sectors as well as the government, and 96% of its leases by gross rental income having inbuilt rental escalations.
• Re-rating catalyst: better than expected rental reversions.
• Downside risk: protracted slowdown in the US economy which could dampen appetite for office space.

Source: CGS-CIMB Research - 3 Aug 2020