Manulife US REIT released their third quarter 2017 results early in November with resounding results.
Growth exceeded expectations with net property income exceeding projection by 20.9%, distributable income exceeding projection by 25.8% and distribution per unit exceeding projection by 9.6%.
This is quite a mean feat which blew their first and second quarter 2017 results out of the water.
In the first and second quarter of 2017, actual results beat projections by single digit percentages, and was overwhelmed by third quarters’ results.
Let’s take an in-depth look on what exactly happened.
Positive growth in Manulife US REIT key metrics
All key metrics, namely gross revenue, comprised of rental and other income and recovery revenue, net property income, net income, distributable income and distribution per unit are up by high single or double digit percentages.
The difference between net property income and net income is that net property income is calculated as gross revenue minus property operating expenses.
Thereafter, manager’s base fee, trustee’s fee, other trust expenses, finance expenses, fair value change in investment properties and tax expenses are deducted to get net income.
Manulife US REIT’s gross revenue (USD) and net property income (USD) has been on an uptrend since 4Q2016 when full quarter results were available.
Distribution per unit however saw a slight dip from 1.65 US cents in 1Q2017 to 1.58 US cents in 2Q2017.
Generally distribution per unit has been on an uptrend, rising from 1.54 US cents in 4Q2016 to 1.6 US cents in 3Q2017.
With the US economy on firm footing, Trump aside, this trend should continue.
The REIT will also likely be helped by positive rental reversion of 12.2% based on new leases and renewals signed from 1 Jan 2017 to 30 Sept 2017.
During this period, a total net lettable area of 18,010 sqft was signed by the REIT.
Figueroa and Peachtree have been performing well, with rental reversion at 0.6% and 0.4% respectively. This positive performance is carried on from 2Q2017 where the assets registered 1.4% and 0.2% rental reversion respectively.
There is no rental reversion information for Plaza in 2Q2017 because it was only acquired in 3Q2017.
Something to watch out for is Michelson which saw -3.0% rental reversion in 3Q2017, down from 0.4% in 2Q2017.
Come 2019, Michelson will see 35% and 30% of their space by cash rental income and net lettable area respectively roll over.
Among the 3 assets, Michelson is the asset that will see the most number of renewals.
Figueroa and Peachtree have large lease expiries only in 2022 and beyond. This early lease expiry profile of Michelson will be balanced by the other 2 assets.
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On a whole, the lease expiry profile of Manulife US REIT is one where expiries are concentrated in 2022 and beyond. Specifically, 69% and 73% of area by cash rental income and net lettable area respectively will be due in 2022 and beyond.
The next highest year where most leases are due for expiry is in 2019, contributed mainly by Michelson.
Another asset to watch out for in Manulife US REIT’s portfolio is the Plaza building which was just acquired in the quarter.
There are 2 years where all the leases are expiring, namely 2020 and >2022. In 2020, 22.5% and 22.1% of space by cash rental income and net lettable area will be expiring.
The remainder will all expire in 2022 and beyond. Because of the nature of the lease expiry profile, this asset is slightly different from the others.
This also presents a risk area because of the concentrated expiry profile. Based on the acquisition presentation, the Plaza is in New Jersey, 3 miles from Manhattan, New York, and is an 11 storey class A office building.
The purchase price of US$115m is slightly below valuation of US$116m. At an occupancy rate of 98.9%, Plaza is helpful to the overall portfolio which had an occupancy rate of 95.9% as of 2Q2017.
One of the acquisition rationale of Plaza is it’s positioning as a cost-efficient alternative to the Manhattan office submarket.
The Plaza is an affordable office location just across the Hudson River from Manhattan, NY. There is also excellent regional connectivity through public transport infrastructure and interstate highways.
At a WALE of 9.2 years, the asset also increases the protfolio’s WALE which was 5.3 as at 2Q2017.
Furthermore, 99.9% of leases by NLA have built-in rental escalations providing organic growth to topline revenue figures.
Thankfully, the Plaza acquisition is accretive to DPU, risingfrom 3.55 US cents to 3.63 US cents. The picture is not so rosy for NAV, which falls from US$0.87 to US$0.86, mainly because of 96m new units issued to finance the acquisition.
Portfolio valuation increased
One good sign for the portfolio is that there is evidence of capital appreciation for the assets.
As a portfolio, value rose from US$834m as at 31 Dec 2016 to US$858 as at 30 June 2017. This represents a rise of 2.9% within half a year or approximately 5.9% on an annualized basis.
From acquisition on 20 May 2016, portfolio value has risen by 10.3% from US$778m to US$858m.
The biggest contributor to the increase in valuation is Figueroa which saw value rise by 14.2% between acquisition on 20 May 2016 to 30 June 2017.
Behind it was Peachtree with an 8.9% increase and Michelson at 7.6%.
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Keeping in mind the negative rental reversion in Peachtree as mentioned earlier, this will be one area to watch going forward.
Investors would not want the reversion to keep being negative because it will have an adverse effect on valuation.
As valuation is done half yearly, the new Plaza and Exchange acquisitions are not calculated in total valuation figures.
Comfortable gearing and low average interest rate
Manulife US REIT has a gearing ratio of 33.1% as of 3Q2017, a few percentage points below the average REIT gearing of 36%.
Likely because of its strong sponsor and asset location in a developed nation, Manulife US REIT is getting a favourable interest rate of 2.6% p.a.
This rate is comparable to other Singapore government backed companies such as Mapletree and Capitaland REIT.
Even though the interest rate has risen from 2.5% in 2Q2017, it is likely still within the comfortable range for Manulife US REIT to handle.
In actual fact, the finance expense of US$2.4m in the consolidated statement of comprehensive income and distribution statement is about 16% of the net property income.
Investors should be concerned when this amount rises above 35% as a ballpark estimate because any increase in interest rates will see a more onerous hit on the REIT.
Manulife US REIT did not disclose any yield figures in their presentation, but based on an annualized DPU of 5.8 US cents and 31 Sept 2017 closing price of 0.92, the yield is approximately 6.3%.
At this yield level, it is slightly higher than the average 6% dividend yield of Singapore REITs.
Prices have actually corrected from US$0.98 on 18 Sept to US$0.88 as of 24 Nov. At this level, prices are still higher than the IPO pricing of US$0.83.
Should prices fall to US$0.83, yields will be 7%. Personally, that will be an attractive yield level to enter. That may be some time off, so if yields reach the 6.5% range, that would be a good time to pick up some units.