Resilient Portfolio, 8.0% Yield

• Manulife US REIT (SGX:BTOU)’s portfolio occupancy in 3Q20 was lower at 94.3% due to two non-renewals and as leasing velocity fell sharply with tenants adopting a wait-and-see.
• While near-term demand will likely remain muted on the back of pandemic-induced uncertainties, FY20-21 DPUs are cushioned by limited lease expiries, its strong assets, and quality tenancies.
• Manulife US REIT's valuations are undemanding at 8.0% FY20 yield vs 5.0-6.2% for its S-REIT peers, backed by high DPU visibility with stable income growth and low leasing risks. We kept forecasts and DDM-based Target Price unchanged (COE: 7.0%, LTG: 2.0%).
• We see DPU upside for Manulife US REIT with low 39.9% leverage supporting further acquisition opportunities. Maintain BUY.

Slow, Quarter, a Dip in Occupancy

• Manulife US REIT's portfolio occupancy fell q-o-q from 96.2% to 94.3% in 3Q20 due to two expiring leases at Peachtree and Centerpointe; both were unrelated to the pandemic and attributed to rationalisation activities. 94% of its rents were collected in 3Q20, vs 98% for 9M20, while 0.3% of deferment and 0.2% of abatement were provided mainly to its F&B, lifestyle and retail tenants.
• No leases were signed in 3Q20, and as such 9M20 execution was unchanged from the ~217k sf at +7.9% rental reversion in 1H20.

Long WALE, Low Leasing Risks

• Manulife US REIT's WALE contracted to 5.5 years (from 5.7 years in 1H20), with 56.7% of leases by NLA expiring in 2025 and beyond. WALE for its top ten tenants (public-listed companies, government bodies, corporate headquarters), contributing 35.4% of gross rental income, was higher at 6.3 years.
• Manulife US REIT's expiring leases in FY20-21 at 7.9% of NLA are from Capitol, Figueroa and Michelson. Except for the latter, the properties are trading at 6% below market rents. This and limited comparable supply in its sub-markets, should cushion both occupancies and rents in FY20-21E.

Balance Sheet Healthy

• Borrowings of USD223.7m for the Penn and Michelson properties are due to be refinanced in FY21, and we estimate USD3.0m cost savings, or 3.2% of its distributable income. Leverage rose to 39.9% (from 39.1%) from its 1H20 payout in Aug and capex, with an estimated USD200-400m debt headroom (45-50% limit) to support potential deals.

Source: Maybank Kim Eng Research - 5 Nov 2020