SINGAPORE (Oct 13): DBS Research is maintaining its “buy” call on Manulife US REIT (MUST) with an unchanged target price of US$1.10, as it offers investors an “interesting mix of high yield and growth”.
According to lead analyst Derek Tan, there are several visible benefits that can arise from investors having MUST in their portfolios. For a start, the REIT delivered two acquisitions in 2019 alone as part of its apparent inorganic growth strategy providing investors with improved diversity in earnings, exposure and a stronger growth profile, coupled with geographical diversification for the REIT.
“The latest acquisition of 400 Capitol, while accretive, presents upside to cash flows its rents are up to 11.5% below asking levels. We project the property to mark-to-market in the coming years as leases are rolled over,” says Tan in a Friday report.
“In FY19, we expect MUST’s DPU to be boosted by the full-year contribution from the recent acquisitions of 1750 Pennsylvania Avenue, Washington DC, Phipps Tower, Atlanta and Centerpointe I & II, Virginia,” he adds.
These acquisitions are also poised to pay off handsomely for both the REIT and investors, as MUST could well deliver a 4% DPU CAGR over FY19-21F, which would make it one of the fastest-growing REITs listed in Singapore over the next three years.
Notably, the acquisitions have in no way affected MUST’s gearing adversely, as its gearing has stabilised at 37-38% following the acquisitions and equity-raising rounds, providing additional debt headroom for more acquisitions.
Apart from acquisitions, Tan notes that MUST is on the cusp of being considered for inclusion into the FTSE EPRA/NAREIT Developed Asia Index after its recent fund-raising round, which could act as a catalyst for the stock.
The manager noted that in the longer term, the inclusion will bring about more liquidity, international visibility and a potential rally in share price for the REIT, citing that MUST is approximately somewhere between US$130 million ($178 million) and US$140 million away from the minimum threshold for consideration for inclusion.
Tan notes that the gap is likely to have been closed with the recent fund-raising of US$142.1 million. This comprises a placement priced at 87.6 US cents per unit to raise gross proceeds of US$80 million, after executing on the upsize option, and a preferential offering of US$77 million priced at 86 US cents per unit.
“Based on pro-forma estimates, the deal is expected to be accretive and boost DPUs by 2.3%,” shares Tan. “Post fund-raising, MUST should meet the criteria to be considered for inclusion in the EPRA NAREIT Developed Asia Index and this could result in potential inclusion in the next review.”
Based on other metrics, MUST is well positioned to thrive in the near term. For instance, approximately 55% of MUST’s properties have inbuilt rental escalations of about 2.5% embedded into their lease contracts, which in turn promise strong organic growth. Furthermore, about 39% of leases by net lettable area (NLA) have mid-term or period rent increases, providing a visible and growing income stream.
With leases typically signed on a 3 to 10-year lease and some in excess of 10 years, MUST’s portfolio also enjoys a long weighted average lease expiry (WALE) of some 6.2 years. Although 7.7% of its leases are expected to expire by 2019 and 2020, Tan expects the leases to revert positively upon renewal, as majority of the REIT’s properties are currently 5-10% below market rents.
However, Tan cautions that the non-renewal of leases could well jeopardize the REIT’s financial and operational figures.
“MUST’s financials, operations and capital growth may be adversely affected by bankruptcy, insolvency or downturn in the businesses of its tenants, which may lead to non-renewal of their leases,” Tan says.
But according to the brokerage, this could well be the time to invest in MUST. The REIT seems poised to do more than just continue delivering stable returns, but has several opportunities to capitalise on.
Units in Manulife US REIT closed one US cent higher, or 1.10% up, at 92 US cents on Friday, translating into a price-to-earnings (PE) ratio of 16.67 times, and a dividend yield of 6.9% for FY19F according to DBS valuations.
