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Manulife US REIT kept at 'buy' by RHB on strong demand, index inclusion

PC Lee

SINGAPORE (Dec 13): RHB Research is keeping Manulife US REIT (MUST) at "buy" with new target price of US$1.10 on strong demand for US office property, low interest rates, strong earnings track record and better investor education.

In a Friday report, analyst Vijay Natarajan says US office rents are expected to continue their uptrend, increasing 0.9% q-o-q in 3Q19. And although the co-working sector is seeing tapering office growth, demand from tech, creative, and life sciences tenants should continue to drive occupancy gains, adds the analyst.

"We also note that supply ahead in MUST’s sub-market remains limited. Overall, co-working spaces still account for only <2% of MUST’s portfolio, thus we see limited impact from the potential fallout of co-working operators for now," says Vijay.

In addition, MUST's recent inclusion into the FTSE EPRA NAREIT Global Developed Index should raise its liquidity and visibility and further narrow the trading yield discount between MUST and S-REIT office peers.

In FY19, Manulife US REIT made two acquisitions of Centerpointe and 400 Capitol to drive inorganic DPU growth. According to Vijay, with overall portfolio rents are still 5-15% below the market rates, this means there is still room for organic rent growth.

For 2020-2021, 7% and 6% of leases by gross income are due for renewal, says Vijay. "We expect positive mid-single digit rental reversions. Additionally, 95% of leases have an in-built rent escalation of about 2% pa," adds the analyst.

Meanwhile, MUST is waiting finalisation of the proposed US tax laws, which should be ready by 1H20. If there are no additional changes to the proposed draft regulations, MUST will be able to roll back its existing tax structure to IPO tax structure.

"This will help in avoiding the income tax paid at its Barbados entity, and result in additional tax savings of about 1.5% pa, thereby lifting distributions," says Vijay.

Although MUST is up 30% ytd, outperforming the S-REITs Index which is up 17%, the analyst valuations to remain reasonably attractive at 1.2 times book value, post rally.

Units in MUST closed 2.5 cents lower at 98 cents on Friday.