SINGAPORE (Apr 16): RHB is maintaining its “buy” on Manulife US REIT but raising its target to US$1 from 98 US cents to factor in 1-2% higher FY18-20 DPU forecasts on contributions from its latest acquisitions.
The manager of Manulife US REIT last week announced the acquisition of two office properties from its sponsor, namely 1750 Pennsylvania Avenue (Penn) and Phipps Tower (Phipps), for a total of US$387 million ($507.8 million).
See: Manulife US REIT acquires two properties from sponsor for US$387 mil
In a Monday report, analyst Vijay Natarajan says he believes that contrary to some concerns regarding the REIT’s rapid pace of acquisition-led growth, he believes the acquisitions have not compromised unit holders’ interests and would ultimately benefit them instead.
This is because the assets have been recently completed and renovated, which therefore minimises immediate capex requirements, in his view.
“For debt, management has assumed a four-year fixed-term loan at 4.5% pa, which we believe is fairly conservative. We have currently assumed a 50-50 perps/debt structure in our model,” he explains.
Natarajan further highlights both assets’ excellent location attributes and quality tenant bases, which he believes to complement the REIT’s existing portfolio well.
“For Penn, which is located blocks away from the White House, c.85% of the building is occupied by the US Government and global agencies, with the Department of Treasury and the United Nations Foundation being the anchor tenants. The building has a long WALE of 6.8 years with minimal expiries until 2020,” elaborates the analyst.
“In Phipps, Carter’s is the major tenant occupying c.65% of the building. The asset has a WALE of 10 years with minimal expiries until 2023. In addition, both asset have rent escalations of 2% to 3% pa, except for the government agencies,” he adds.
Noting that the passing rents of both properties are 12-25% below that of the market average, he also thinks the under-rented portfolio presents good room for organic rent growth in the future despite minimal near-term upside due to locked-in leases.
“Manulife US REIT’s latest acquisition of two quality assets from its sponsor demonstrates its inorganic growth ability and reiterates strong sponsor commitment towards its growth,” says Natarajan.
As at 10.59am, units in Manulife US REIT are trading flat at 92 US cents.
