Analysts are upbeat on Manulife US Real Estate Investment Trust (MUST) following its latest FY2020 results announcement, which saw a 5.4% y-o-y drop in DPU to 5.64 US cents, mainly due to provisions for expected credit loss, and a sharp reduction in car parking income.
While gross revenue rose 9.3% to US$194 million in FY2020, property expenses rose 17% to US$78.5 million. Net property income (NPI) in FY2020 rose 5.6% to US$115.8 million. MUST’s 2H2020 was weaker than the first where gross revenue rose just 1.2% while property expenses rose 16.5% resulting in an 8.3% y-o-y decline in NPI to US$53.6 million.
See: Headwinds in 2020 largely in the price as Manulife US REIT looks forward to 2021
Despite weaker results, analysts are all keeping their “buy” calls on the REIT.
DBS Group Research has a target price of 90 US cents, lower than US$1 previously. But still liking the stock as it is trading at about 8% yield and 1 time P/NAV.
In a Feb 9 report, lead analyst Rachel Tan says that its yield spread remains attractive and favourable with Fed rates expected to stay low for longer.
Meanwhile, MUST managed to maintain its healthy operational metrics despite lockdown procedures in the US. Low expiring leases in FY2021 also helps to reduce risks.
“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, we have already seen higher trading liquidity and yield compression for MUST. Given its strong execution and acquisition track record, we believe MUST will continue to command a premium over its peers,” says Tan.
Maybank Kim Eng has a lower target price of US$1.10 from US$1.15 previously.
In a Feb 8 report, analyst Chua Su Tye says, “We expect FY2021-2022 DPUs to be cushioned by its low lease expiries, its strong assets and quality tenancies. Valuations are undemanding at 7.9% FY2021 yield (as management maintains a 100% payout) compared to 5.0-6.0% for its S-REIT peers, backed by high DPU visibility with stable income growth and low leasing risks, and upside as it returns to acquisition mode.”
On the outlook, Chua believes that with the REIT’s increased leverage of 41.0% from 39.9% and debt headroom of US$375 million (50% limit), management will be eyeing larger M&A deals of US$500-600 million from third parties or joint ventures, as it pushes into business parks to add 20% of high-growth tenancies.
RHB Research Group too has kept its “buy” call but with a lowered target price of 87 US cents from 90 US cents.
Analyst Vijay Natarajan says in a Feb 9 report, “2HFY2020 results slightly missed mainly due to provisions. US office leasing activity has started to pick up with vaccine roll-outs and the gradual return of employees back to offices. Management is on the lookout for portfolio acquisitions and M&A opportunities to further diversify and position its portfolio in growth sectors.”
The REIT is also open to divest some of its mature assets if a good opportunity arises. “With gearing at 41%, any acquisitions ahead is expected to be a combination of debt and equity and we believe accretive acquisitions are still possible with low cost of debt of c.2% and a wide range of US office cap rates at 5.5-7%,” says Natarajan.
CGS-CIMB too is positive on the stock but with a lowered target price of US$1 from US$1.05.
“We continue to like MUST for its resilient portfolio, with 96% of its leases by gross rental income having inbuilt rental escalations,” says analyst Lock Mun Yee, noting that MUST’s unit price has been underperforming in recent months and at the present projected FY2021 DPU yield of about 8.6%, which is likely because the market has priced in near-term risks.
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OCBC Investment Research continues to rate MUST “buy” with a fair value estimate of 83 US cents.
“We expect leasing momentum to remain soft in FY2021 as tenants reassess their office space requirements, and plan for a very gradual re-entry to the office. However, MUST’s minimal lease expiry profile in 2021, resilient portfolio with long WALE of 5.3 years, and annual rental escalation of 2.0% could limit downside risk and provide income stability,” says analyst Chu Peng.
And with the rollout of vaccines in the US, MUST is poised to benefit from the gradual reopening and recovery of economy.
Similarly, PhillipCapital has a target price of 84 cents.
Analyst Natalie Ong says, "Rental collections improved from 94% to 97% in 4QFY2020. MUST booked a US$3.6 million impairment for receivables in 4QFY2020, mainly from one retail and several F&B leases. Half of its credit provision was attributed to this retail tenant. In February 2021, MUST managed to get the tenant to agree to repay the arrears in full. Writing back the arrears, collection rate would have been 99%."
Meanwhile, the trust executed 279,000 sq ft of leases in FY2020, accounting for 5.9% of NLA. Leases signed were
mainly from traditional office-using sectors such as legal, real estate, information, finance and insurance. New leases, renewals and expansion accounted for 35.6%, 58.7% and 5.7% of the leases signed.
On the outlook, MUST is eyeing new tenant in the New Economy sectors and business parks, expecting soft leasing in the near term and expecting US$3 million in interest saving from refinancing.
As at 3.35pm, units in MUST are trading at 72 cents or 1.0 time FY2021 book with a dividend yield of 8.1%, according to RHB’s estimates.
