SINGAPORE (June 24): DBS Group Research continues to rate Manulife US REIT (MUST) a “buy” but with a lower target price of US$1.00 from US$1.15 previously.
Lead analyst Rachel Tan explains that the lower target price is based on her conservative forecast as she incorporated some impact of a weaker economic outlook as the US slowly recovers from the lockdown.
“Trading at about 8% yield and 1 time P/NAV, we believe yield spread will remain favourable with the Fed holding rates low for a longer period,” she adds.
MUST is now placed 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.
Following this, the counter has experienced higher trading liquidity and yield compression. And given a strong execution and acquisition track record, the analyst believes MUST will continue to command a premium to its peers.
Meanwhile, MUST in 1Q20 managed to successfully reduce its expiring leases in FY20 to about 4% of CRI on a decent WALE profile of 5.7 years, thus further lowering vacancy risks in the near-term. Committed occupancy also remains high at 96.5% and rental collections have remained healthy despite the lockdown.
Already MUST has provided rental deferment to some 2% of tenants by GRI, and management expects that there could be more rental deferment requests coming through in 2Q20 as the lockdown typically impacted US from March 2020 onwards. But management does not expect the amount to be significant and will consider rental deferment with interest charged on late payments rather than rental rebates.
Although the transaction market remains slow with most sellers either withdrawing or adopting a wait-and-see approach. Management has not seen a huge amount of distress sales but expect this to increase in a year’s time if the economy takes longer than expected to recover.
“However, we take a cautious stance on the US economy and reduced our distributable income projections by 8% to 15% by removing our previous acquisition assumption and factoring in some vacancy and lower rents,” says Tan.
As at 12.30pm, units in MUST are trading at 76 US cents or 1.0 times FY20 book with a distribution yield of 7.7%.
