Following the acquisition of three office park assets in Phoenix and Portland in the US on Nov 30, analysts are positive on Manulife US REIT’s (MUST) prospects.
CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei have kept “add” on MUST with an unchanged target price of 91.8 US cents ($1.26).
In their report on Nov 30, Lock and Eing see the acquisition as boosting the REIT’s exposure to growth sectors such as tech and healthcare as well as growth markets such as Atlanta, Phoenix and Portland.
“Post-acquisition, MUST’s occupancy and weighted average lease expiry (WALE) will also improve to 91.3% and 5.2 years respectively. More importantly, not only are market rents in Phoenix and Portland projected by CoStar, a provider of commercial real estate information and analytics, to continue rising over the next 12 months, the current in-place rents of Trio properties are 9.3-14.7% below market,” write the analysts. “This should translate into positive reversions when leases are re-contracted, in our view.”
The deal is said to be accretive to MUST’s distribution per unit (DPU), despite the slight dip to its book value (BV) per unit to 70 US cents post-acquisition
“Our dividend discount model (DDM)-based target price remains at 91.8 US cents, pending the completion of the acquisition and fund raising exercise. At a projected FY2021 dividend yield of 7.7%, we believe much of the slower near-term growth has been priced in,” say Lock and Eing.
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The analysts say better-than-expected rental reversions and a faster-than-expected ramp up in portfolio occupancy are potential re-rating catalysts while a protracted slowdown in the US economy, which could dampen appetite for office space, is a key downside.
RHB Group Research analyst Vijay Natarajan has, too, maintained “buy” on MUST with an unchanged target price of 90 US cents.
To him, the acquisition was “much-awaited”, with the assets being “a good complementary fit” to MUST’s current portfolio, with increased exposure to tenants in the tech and healthcare sector, along with a longer lease expiry profile.
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“While the emergence of the Omicron variant poses a risk to the US office market recovery, our base case assumption is that this is temporary. Valuation is attractive at 1 times price-to-book value (P/BV),” he writes in a Dec 1 report.
Natarajan has also revised his DPU estimates by 0% to 1% for the FY2021 to FY2023 which factors in MUST’s latest acquisition and US$100 million of equity fund raising.
“Based on our proprietary in-house methodology, we derive an ESG score of 3.3 out of 4.0 for the REIT, a score that is one of the highest among REITs. As this score is three notches above our country median score, we applied a 6% premium to our intrinsic value to derive the target price,” he adds.
Finally, UOB Kay Hian analysts Llelleythan Tan and Jonathan Koh have kept their “buy” recommendation with a higher target price of 87 US cents from 84 US cents from MUST.
“The trio of acquisitions reinforces MUST’s plans to increase exposure to high-growth tech and healthcare sectors,” they write in a Dec 3 report.
The three properties will also enhance MUST’s portfolio resilience with a higher portfolio occupancy rate and WALE.
“The trio has no significant near-term lease expiries with only 2.3% of leases by gross rental income (GRI) expiring in 2023,” note UOB Kay Hian’s Tan and Koh.
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“All three properties have an average annual escalation of 2.5% built into its leases. This brings the average annual escalation for the enlarged portfolio closer to 2.2%. Additionally, the trio is under-rented by 9.3-14.7%. It is likely that we can expect strong rental reversions of about 12.3% when leases expire,” they add.
Like RHB, the analysts at UOB Kay Hian have adjusted their DPU forecast for FY2021 to FY2023 to include the new acquisitions.
“We decrease our 2021 DPU by 3.9% due to a larger unit base from the private placement and increase our 2022-23 DPU forecasts by 3.4 and 4.1% respectively due to contributions from the three acquisitions,” they write.
Units in MUST closed flat at 66 US cents on Dec 15.