The US presidential election had surprised the market with Donald Trump’s win, but what was even more surprising was that the Dow Jones Industrial Average’s (DJIA) initial decline pre-election not only recovered swiftly, but continued to break new highs hitting a record high of 19,549 points on 7 December 2016. With Trump’s pro-business pro-market stance, it seems that the US’s growth momentum is likely to continue for a while longer. SI Research takes a closer look at Manulife US Real Estate Investment Trust (Manulife US REIT), which investors could ride on.
About Manulife US REIT
Manulife US REIT is a Singapore-listed REIT whose investment strategy is primarily to construct a portfolio of income-producing office real estate in key markets in the US. It was only recently listed in the Singapore Exchange (SGX) on 20 May 2016, at an initial public offer price of US$0.83. At present it holds a portfolio of three office properties in the US, namely Figueroa in Los Angeles, Michelson in Irvine, and Peachtree in Atlanta, with a total net lettable area of 1.8 million square feet and a portfolio valuation of US$813.2 million.
Performance And Outlook
Manulife US REIT released a satisfactory 3Q16 quarterly result, in line with analysts’ expectations. Despite lower gross revenue that missed forecast by 1.1 percent, its net property income of US$17.6 million actually outperformed forecast by 1.5 percent, mainly due to lower property operating expenses. Consequently, this leads to income available for distribution beating forecast by 5.8 percent at US$0.0201 per unit.
Looking forward, demand for commercial real estates in the US will remain strong, driven by high absorption rate coupled with limited supply. Manulife US REIT’s portfolio of quality office properties located strategically across prime areas of key US cities, are even able to fetch a remarkable high occupancy rate of 97 percent as compared to US market average of 87.5 percent, with a weighted average lease expiry (WALE) of 6.1 years. As such, we would expect distributable income for the coming years to remain stable with marginal growth, given 99.2 percent of existing leases have in-built rental escalations. This has not taken into account Manulife US REIT’s healthy gearing of 34.7 percent which allows it sufficient debt headroom for further acquisition and growth.
With Trump proposing tax cuts and new infrastructure spending which may potentially drive up inflation, coupled with better than expected employment data, the Federal Reserve looks set to raise interest rates in the last meeting of the year on 13 and 14 December. Rising rates will impact REITs in a negative way. Firstly, a rise in interest rates will increase the cost of debts which REITs utilise to finance their assets, consequently resulting in their net profit and income available for distribution to decline. Secondly, a rise in interest rates makes REITs relatively less attractive (assuming dividend stays constant), thereby exerting downward pressure on REITs’ prices.
How then, would Manulife US REIT fare in a rising interest rate environment as compared to its peers?
Manulife US REIT current gearing ratio stands at 34.7 percent, with gross borrowings of US$296 million as at 30 September 2016. All borrowings are secured on fixed interest rate with a weighted average interest rate of 2.46 percent per annum. As such, we opine that the impact of rising interest rates on Manulife US REIT’s interest expenses would be minimal. Recent weeks saw the REIT sector experiencing a series of corrections since November 2016 after Trump’s win, possibly due to heightened expectation of upcoming US rate hike. By taking a closer look we can find that Manulife US REIT had actually exhibited less volatility by correcting only approximately 5 percent during that period, outperforming the FTSE ST Real Estate Investment Trusts Index which fell around 7.5 percent. This goes to show that Manulife US REIT is probably in a better position to withstand the interest rate risk than the general REIT sector, attributable to its proactive and prudent capital management.
Manulife US REIT’s distribution policy states that it will be distributing 100 percent of its distributable income from listing till financial year 2017, and at least 90 percent thereafter. Based on the projected distributable income in 2017 and current price of US$0.825 as of 8 December 2016, Manulife US REIT will have a projected dividend yield of 7.1 percent in 2017, which is comparable to the average DPU yield at around 7 percent of other commercial REITs listed in the SGX. In addition, with a net asset value of US$0.84 per unit as of 30 September 2016, its current price reflects a price-to-book (P/B) valuation of approximately one times, which is pretty reasonable too.
For investors who are optimistic on the US economic outlook and would like to gain some exposure in the US commercial property sector, while at the same time receive streams of decent and stable dividends without the 30 percent withholding tax, Manulife US REIT is probably a counter worthy of some attention. However, due to it being a REIT in itself, it should be regarded as more of a long term investment for dividend income as it is still likely to be subjected to short-term volatility from uncertain interest rate movements.