Analysts are bullish on Manulife US REIT (MUST) following its results announcement on Aug 3, as the manager of the REIT declared a 1H20 distribution per unit (DPU) of 3.05 US cents, up 0.3% from 3.03 US cents in 1H19.
Distributable income for the period rose 20.0% y-o-y to US$48.0 million.
Gross revenue for the half-year period came in at US$98.6 million ($135.5 million), 18.3% y-o-y, largely due to contributions from Centrepointe in Washington, and Capitol in California, which were both acquired in FY2019.
See: Manulife US REIT declares 0.3% increase in 1H20 DPU to 3.05 US cents on 'resilient portfolio'
On the back of this, RHB Group Research is keeping its “buy” recommendation on MUST with a target price of 90 US cents.
Analyst Vijay Natarajan says in an Aug 4 report, “Despite Covid-19 derailing the US economy, office assets have shown good resilience with occupancy uptick YTD and continued rental growth. With limited near-term lease expiries, strong assets, and good quality tenants, we believe Manulife US Real Estate Investment Trust is well positioned to weather market challenges.”
The analyst also likes the stock for its stable 8% dividend yield, which is attractive in current market conditions.
Overall, the REIT’s 1H results were in line. During the period, leasing momentum was also strong with some 217,300 sq ft or about 5% of leases signed. About 50% were renewals, 8% expansion and 42% new leases, with demand stemming mainly from the finance and insurance, legal, real estate and technology sectors’ tenants.
When asked on the changes in leasing structure, management noted that it has not seen any noticeable changes in terms of leasing structure, with tenants still willing to sign longer leases.
These seems to be no discernible leasing impact from the work-from-home (WFH) trend. While flexible office space is likely to create some reduction in demand, it sees the impact to be partially offset by dedensification trends and limited supply.
Meanwhile, MUST secured a maiden US$100 million five-year green loan to refinance its Peachtree asset at 1.85% interest per annum, which translates to savings in interest costs as overall weighted average interest cost has fallen 16bps from end-2019 to 3.21% pa with 42% of its assets now unencumbered. This caused gearing to increase to 39.1% on the back of valuation decline, but is still well below the 50% limit.
“While US office transactions have slowed down considerably on the back of Covid-19, we believe management could relook acquisition opportunities in 4Q20 if market conditions stabilise,” says Natarajan.
CGS-CIMB shares similar sentiments as it continues to rate MUST an “add” with an unchanged target price of US$1.05.
In an Aug 3 report, lead analyst Lock Mun Yee says, “We continue to like MUST 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.”
Apart from stable portfolio occupancy and positive rental reversions, MUST 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, MUST has a remaining 3.5% of portfolio gross rental income due to be renewed in 2H20 and a further 6.1% in FY21. MUST indicated that its portfolio remains 5-10% under-rented compared to current market rents.
Meanwhile, much have been debated about the current WFH trends and impact on office demand, but MUST 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.
As at 11.40am, units in MUST are trading at 78 US cents or 1 time FY20 book with a dividend yield of 7.9%, according to RHB’s estimates.
