SINGAPORE (Aug 20): Market watchers continue to favour Manulife US REIT (MUST) for its high distribution per unit (DPU) visibility on the back of stable income growth and low leasing risks.

The US office REIT saw a fundamentally strong 2Q19, with robust performance across a number of key financial metrics.

For a start, a DPU of 1.53 US cents was declared, some 17.7% higher than the 1.30 US cents DPU declared for the same quarter the previous year.

Property operating expenses and finance expenses saw marked increases to US$16.1 million ($22.3 million) and US$6.2 million, respectively, due to the enlarged portfolio costs following the acquisition of Centerpointe, Penn, and Phipps.

But the additions to its portfolio seem to have paid off handsomely.

Gross revenue for the quarter increased 33.2% to US$43.3 million, while net property income rose 33.8% to US$27.3 million.

The improvements were largely attributable to rental escalations and contribution from the two properties acquired in 2018 — Phipps in Atlanta and Penn in Washington, DC.

See: Manulife US REIT declares 17.7% increase in 2Q19 DPU to 1.53 US cents on higher sales

Across the portfolio, rental escalations are rising at a steady 2.0% per annum.

In 2Q19 alone, MUST secured leases for about 246,000sqf of its portfolio, up from 121,000 sqf in 1Q19.

The leases for 1H19 were noted to have a long weighted average lease expiry (WALE) of 8.6 years and a rent escalation of 2.8% pa, providing good earnings stability and organic growth prospects.   

Excluding Michelson’s leases which dragged down the overall rent reversion, the management notes that rent reversions were healthy in low double-digits due to the assets trading 5-15% below market rates. Overall occupancy too remained relatively stable at 97.2%.

Another reason experts remain bullish on the REIT is its strong presence in the US office market.

“The outlook for the US office market remains favourable, with positive demand-supply dynamics and we see MUST’s high quality office assets as a good proxy to this trend,” says Vijay Natarajan, an analyst at RHB Group Research.

With statistics displaying a 0.1% q-o-q fall in unemployment rates and strong job numbers indicating resilient hiring activity, a strong 2H19 seems to be in the pipeline.

This is further bolstered by one of Peachtree’s co-working tenants expanding its current office space by 50%, and the supply outlook in MUST’s micro markets remaining limited with high replacement costs.

Analysts also expect MUST to benefit from a potential upside from tax structure rollback. The REIT is expected to rake in additional tax savings of 1.5% in the event of a rollback to its IPO tax structure upon the finalisation of proposed US tax regulations, which would allow it to avoid the need for a Barbados entity.

Following the recent acquisitions, MUST is also closer to meeting the free float and liquidity criteria for inclusion into the NAREIT Index, which would increase liquidity and widen its investor base.

RHB is maintaining its “buy” call on MUST with a target price of 98 US cents, citing the REIT as its “top pick” for the sector.

“Organic and inorganic growth are expected from built-in rent escalations and acquisitions,” says Natarajan in a report on Aug 15, adding that MUST’s 2Q results were in line with expectations.

“Valuations remain attractive with 6.7% yields and 1.1x P/BV,” he adds.

Similarly, Maybank Kim Eng Research is maintaining its “buy” call on MUST with a target price of US$1.00, noting that MUST is the first pure-play US office REIT to be listed in Asia, making it a good proxy for the rebounding US economy with good acquisition growth pipeline.  

“We continue to favour MUST for its DPU visibility, supported by stable income growth and low leasing risks,” analyst Chua Su Tye. “We expect occupancies and rents to be supported with limited new supply.”

Chua also notes that MUST has completed five acquisitions worth a total of US$842 million since its IPO in May 2016.

The REIT also aims to scale up its assets under management from $1.7 billion to US$2.6 billion within the next two years, Chua says.

As at 4.20pm, units in Manulife US REIT are trading half a US cent higher at 90 US cents. According to Maybank valuations, this implies an estimated dividend yield of 6.8% for FY19E.