Manulife US REIT a counter to watch as employees return to office in the US: UOB Kay Hian

American real estate consultancy JLL estimates this to prompt more space tours, which will eventually drive gross leasing volumes up.

This spells good news for Manulife, says UOBKH analysts Loke Peihao and Jonathan Koh. The duo are re-initiating coverage on the counter with a “buy” recommendation and target price of US$0.85 ($1.18). This represents a potential upside of 21.4% from the company’s share price of US$0.70 as at July 21.

“Manulife US REIT trades at an undemanding valuation of 8.5% forward yield (ie 330 basis points above Singapore office peers), despite its freehold and Trophy/Class A properties,” say Loke and Koh. The valuations of other office REITs here are: 5.0% for Keppel REIT, 6.7% for Suntec REIT and 4.0% for Capita Commercial Trust.

Loke and Koh add, that they “like Manulife’s superior assets, long Weighted Average Lease Expiry (WALE) and locations”.

Manulife’s portfolio comprises nine office properties scattered across the US states of California, Atlanta, New Jersey, Washington D.C and Virginia. These premises are typically located near amenities and growing residential developments in city, urban and suburban locations.

Collectively, they offer a net lettable area of 4.7 million sq ft.

“Management observed from past crises, higher quality properties continue to see leasing demand from surviving Class B tenants, which try to take advantage of the more affordable rents,” observe Loke and Koh.

As at Dec 31, 2019, these spaces were 95.8% occupied with 182 tenants. Of this, 60% are from trade sectors such as government, legal, finance, technology and healthcare.

Manulife has a WALE of 5.7 years, which Loke and Koh say is “relatively longer” than other S-REITs in the office space. By contrast, Keppel Pacific Oak US REIT has a WALE of 5.3 years, while that for Keppel REIT, CCT is 3.7 years (office) and Suntec REIT (Singapore office) is 3.26 years.

A relatively longer WALE offers stronger income visibility and distribution stability, the analysts say. Still, they stress that the US is a different market compared to Singapore. There “office leases are usually longer at 5/10/15 years (vs. Singapore norm of 3 years) with no break clauses and early termination which can result in severe financial penalties”.

So far, Manulife’s portfolio has proven resilient 98% or 181 of its tenants having paid their April rent. This is as the company has minimal exposure to tenants from sectors such as travel, hospitality, leisure, aviation and oil & gas which have been among the worst hit from the pandemic.

For now, the management anticipates an increase in the number of tenants requesting deferrals to increase from 2% in April to some 10% in May and June.

While things are looking up for Manulife, Loke and Koh express concern over “softening US office demand from a possible secular shift”.

“A slower-than-expected re-opening of the US economy increases the likelihood of more companies leaning towards lasting flexi work polices that reduces their square footage of office spaces,” they add.

Still, Loke and Koh note that flexi-working – which includes work-from-home- has been a norm in the US for over a decade, unlike in Asia where it was perpetuated by the pandemic.

As such, they reckon office spaces will continue to offer value in terms of efficiency/productivity, face-to-face contact for deal making and functionality as a headquarter for decision making.

Drawing reference to the tightening of construction lending, Manulife’s management reckons that “new ground breakings will likely be minimal”. “This will keep the limited supply of Class A/Trophy space in check and support office rental growth,” they point out to UOBKH’s analysts.

As at 1.02pm, shares of Manulife US REIT was up 2.5 cents or 3.496% to USD$0.74.