Manulife US REIT – Highly anticipated entry into high-growth cities6 Dec 2021
- Acquisition of three assets located in high-growth Sun Belt and magnet cities of Phoenix and Portland will increase exposure to tech and healthcare tenants from 9.5% to 12.8%.
- DPU accretion of 4.4% based LTV of 59% with potential 9.0-14.7% upside from under market rents in next major renewal cycle in 2024.
- Maintain ACCUMULATE and DDM-based TP (COE 9.1%) of US$0.84. No change in estimates pending the completion of EFR and acquisition. Prefer Prime US REIT (PRIME SP, Accumulate, TP US$0.94) in the sector for greater tenant exposure to STEM/TAMI sectors.
Acquisition of three office assets – two in Phoenix, Arizona, one in Portland, Oregon. The total consideration of US$201.6mn represents a 2.3% discount to valuation and will increase AUM by 10.5% to US$2.18bn. Cap rates range between 5.8-7.0%. The management intends to finance the acquisition through a combination of debt and equity. Assuming an LTV of 59%, the acquisitions will increase DPU by 4.4%, nudging gearing up from 42.1% to 43.9%. Completion is expected in Dec 21.
What do we think?
Increasing exposure to tech and healthcare tenants. Highly anticipated entry into high-growth Sun Belt and magnet cities of Phoenix and Portland. These two markets have experienced population growth of +15.6% and +12.9% over the past decade due to in-migration, supported by lower business costs for tech companies (Phoenix) and high proportion of skilled talent in STEM/TAMI sectors. The acquisition will increase MUST’s exposure to tech and healthcare tenants from 9.5% to 12.8%. These are New Economy sectors which are enjoying secular growth. However, MUST is still playing catch up to its peers, Prime US REIT (PRIME SP, Accumulate, US$0.94) and Keppel Pacific Oak (KORE SP, not rated), which have c.32% and c.38% exposure to STEM/TAMI sectors.
Improving portfolio metrics and providing potential upside. The acquisition portfolio carries an average occupancy of 93.4% and WALE of 5.9 years, which will lift portfolio occupancy from 90.9% to 91.3% and WALE from 5.1 to 5.2 years. Occupancy at Diablo stands at 85.7% and is the only asset which is not fully leased. However, this will provide rental upside should MUST successfully lease out the vacant space. In-place rents are 9.0%-14.7% below market rents, representing a potential reversionary upside for MUST during the next major renewal period in 2024.
Post-acquisition gearing of c.43% is on the high side for SREITs. Further acquisitions will have to be supported by equity fund raising or divestments. New mutations and waves of the COVID-19 virus may push back return-to-office, setting back recovery in carpark income. The US office market is seeing some green shoots, and subleasing, tenant incentives and free rent are starting to pull back.
Maintain ACCUMULATE and DDM TP of US$0.84
No change in estimates pending the completion of the EFR and acquisition. Catalysts include stronger-than-expected leasing and portfolio reconstitution. The current share price implies FY21e/FY22e DPU yield of 8.2%/8.7%. Prefer Prime US REIT (PRIME SP, Accumulate, TP US$0.94) in the sector for greater tenant exposure to STEM/TAMI sectors.