SINGAPORE (Feb 12): RHB Research is maintaining its “buy” call on Manulife US REIT with a higher target price of 94 US cents compared to 92 US cents previously, upon lowering COE assumptions to 8.3% from 8.4% in its dividend discount model (DDM) to reflect a slightly subdued interest rate outlook.
This comes after Manulife US REIT’s latest set of quarterly results came in line with the research house’s expectations, with 4Q adjusted DPU rising 1.3% y-o-y on higher revenue from acquisition contributions and rental growth at its initial public offering (IPO) properties.
In a Tuesday report, analyst Vijay Natarajan highlights the REIT as one of RHB’s top “buy” picks due to its position as a prime beneficiary of strong US economic fundamentals, based on its exposure to good-quality office assets across gateway cities.
He estimates a three-year CAGR DPU of 3% on the back of Manulife US REIT’s organic rent growth and contributions from newly-acquired assets, and believes valuations are still attractive with the REIT trading at 1 times book value and 7% yield.
With Hyundai Capital America – Manulife US REIT’s fourth largest tenant in its portfolio – having recently renewed its lease at the Michelson building, Natarajan says investor concerns on the lease renewal due to ongoing trade tensions and competitive supply have now been quelled.
“While rent figures were not disclosed due to confidentiality, we estimate the signing rent to be flattish to slightly lower versus the existing one as Michelson is the only asset in its portfolio, which is at a slight premium to market rents. We believe the long lease more than adequately compensate the rental trade-off,” he comments.
The analyst further expects positive rent reversions of 3-5% for the remaining pending renewals for 2019, as most of Manulife US REIT’s assets except for Michelson are currently under-rented at 5-10% below market rents.
“Note that rent reversions are on top of rent escalations which are at c.2-3% p.a., thus providing a good organic growth. Overall occupancy rose 0.2ppt to 96.7% and we expect it to remain around this level on a limited micro-market supply with office demand strong, on the back of strong jobs creation in the US,” says Natarajan.
Going forward, the analyst is positive on the possible removal of a tax overhang in the US, as no changes are expected to be made to the REIT’s tax structure based on proposed 267A regulations.
“MUST will also explore the possibility of reverting to its IPO tax structure (which will remove the need for a Barbados entity) once final regulations are announced by mid-2019. This could potentially help in an additional 1.5% tax savings. Our forecast currently does not factor in this potential upside,” he adds.
As at 11:06am, units in Manulife US REIT are trading flat at 86 US cents or 0.99 times FY19F book.
