Monday, February 11, 2019

Manulife Reit - Strong Performance To End The Year

Manulife Reit published their Q4 FY18 results this morning which saw them registered an impressive 55.4% increase year on year on the Net Property Income (NPI) due to their 2018 recent acquisitions of the two buildings - Penn in Washington DC and Phipps in Atlanta).

In terms of bottomline DPU performance, it grows by 3.6% year on year to end the financial year at 6.05 US cents.

At the current share price of 85 US cents, this represents a decent 7.1% yield for exposure to a freehold Top Grade A quality of US commercial property.

Do note that even while the properties are freehold, the management will have to do AEI enhancement every now and then for wear and tear, and to remake the office look to attract potential tenants. These AEIs typically cost them in the range of $8m to $10m for a smaller to midscale kind of enhancement which they will manage to self-fund using their free cash flow.

For the past 4 quarters, management has managed to increase the operational performance of their properties based on the increasing net property income that is shown to us in the slides.

You can see this trickles down to increasing DPU in the past 4 quarters, from 1.51 US cents in Q1 to 1.53 US cents in Q2 to 1.51 US cents in Q3 and 1.54 US cents in Q4 this quarter.

In terms of debt maturity, it has gone down to 2.7 years, mostly because they are still negotiating to refinance the $110m loan for their Figueroa property.

The average financing interests rate has slowly creeped up to 3.27% this year and if we based on the latest loan they took on their two most recent acquisitions, we can expect this to go up further.

The value driver to shareholders for this will be if management can pass these costs down to the tenants in the form of rental escalations.

Leases rental reversion in FY18 while stands at an impressive 8.9%, it has gone down from the lower base of double digit last financial year.

Manulife has applied for a $1b multi - currency debt programme to drawdown on their debts in 2018 and with the cap of 45% gearing they have around $200m of additional debts they can undertake to play with.

Judging from their lofty ambition to increase their AUM target, along with the relative 7.1% yield, and the availability of many pipeline in the US yielding more than 5% NPI and 7% cap rates, in particular the Dallas, Houston and Pittsburgh area, it won't be too difficult for them to acquire more properties sooner or later.

This is dissimilar to situations in Singapore where most grade A commercial properties are going for around 3.5% cap rates, which makes it harder for management to "acquire" to grow shareholders value.

This can be both good and bad, depending on what your situations are.

Personally for me, I'm a bit wary of management who tried to grow aggressively at the expense of getting a truly solid property which can grow long term. The higher the share price is, the lower the dividend yield to shareholders, the easier for management to do an equity placement and the likely chances are extremely big.

If I were them, I'd already be working on my next M&A target given the current bullishness of the Reit situation and acquisition can sometimes be a double-edged sword.

Still, what the management has done so far has been very pleasing to shareholders with the way they are engaging minority shareholders like us and allowing us to clarify things with them.

Management has reiterated that their current rental leases for most properties are between 5% to 10% lower than the market rate. I am not too sure if that is due to asset enhancement which will play catch-up at a later stage or management indicating stronger reversion growth once occupancy are higher. Either way, it's good to clarify why their rentals are below the market.

They also managed to renew Hyundai recently in Jan 2019 in Michelson area so it'll be good to understand if they managed to secure the renewal at a positive reversion.

*Vested with 81,000 shares as of writing.

Thanks for reading.

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  1. Hi, just wondering why you choose Manu REIT and sell away keppel KBS ? the latter have a higher dividend yield and higher room for share price appreciation ?

    1. Hi Darren

      I was holding both Manulife and KBS the other time when the tax ruling was still not yet clarified. Fearing things might go wrong, I went with reducing my exposure to one of them which happens to be KBS but kept Manulife.

      KBS has indeed higher yield but their properties are not as quality graded as Manulife properties. The higher yield takes that into account.

      I think both KBS and Manu are about as fairly valued as they get right now after their run up so now it's back to the growth stories they've been wanting to increase their aum and see who's got a better buy.

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