Monday, February 8, 2021

Manulife REIT - Full Year 2020 Results & Analyst Briefing

Manulife REIT announced its Full Year 2020 Financial Results this morning and at the same time held an analyst briefing to which I was invited.

The setting was nicely done - it was in a large conference room where there are ample seats for social distancing and a clear view of the presentation.


All of the attendees were given a box of pineapple tarts as well as red packets to commemorate the upcoming Chinese New Year ahead. Thank you to the team for the surprise gifts.


Jill kicked off to give a presentation before the Q&A open floor session.

I'll try to provide more colors on what was discussed during the briefing as detailed as I could.


Like many investors, I am somewhat disappointed when I found out that DPU for Q4 was down by a massive 11.3% as compared to the previous year despite having higher GR, NPI, and DI for the quarter and the year due to the acquisitions made.

The drop in Q4 was mainly due to i.) Lower Carpark Income, ii.) Lower Rental Income due to the higher vacancies in Michelson and Peachtree, and iii.) Provision for credit losses.

On the provision for credit losses, the CFO mentioned that they are being prudent by provisioning for a one-off but these are not actual losses and could be reversed in the upcoming quarters. He then shared an update that just last week one of the tenants that they have provisioned for has paid all the rent in arrears so they would be reversing in the upcoming quarter.

He also shared that should these provisions be halved, the DPU would actually be approximately the same as FY2019. 

My thought on this is the company is just being prudent with the policy and if the recoverable plan is done properly, these will just be a matter of timing essence where investors get to reap the benefits of higher DPU due to one-off in FY2021.

With gearing rising to as high as 41% after the financial year ended 31 December 2020, there is naturally a concern among investors and fellow analysts out there.

The management is adamant and believes that their balance sheet remains financially solid and they have further debt room of about $375m before reaching the cap set by MAS. Furthermore, the CAPEX level is expected to remain similar this year and they also had a revolving facility which they can tap on.

Knowing the management practice for quite some time now, they'd look prudently for yield accretive acquisitions which is likely to be funded more by equity.

This brings us next to the topic of acquisitions.

Jill shared that they are looking for potential yield accretive acquisitions from the West all the way to the East Coast, and has also considered Business Park as their next go-to asset class.

One analyst questioned if the diversification into Business Park will make downgrade Manulife and change the company's vision into moving into other types of properties.

The management then shared that the business park in the US is unlike the business park that we have in Singapore, which usually tends to cater more towards industrial and logistics. In the US, the business park occupancy tenant can fill in the likes of financial institutions such as Meryl Lynch, and also tech company with the likes of Google. They may not be necessarily restricted to a particular set of industry classes.

My first thought on this is they must have started looking at this as a means to give them a wider choice of a pipeline, especially given that most of the US properties cap rates are in between 6-7% and Manulife itself is trading at a yield of 7.8%, it will be more difficult to look at Grade A yield accretive acquisitions if you are just limiting yourself to office play. Plus, with the gearing at 41%, it will not be easy to fund the deals with debt, which gives you a lesser choice of play from the management's point of view.



There were a few discussions on the occupancies of some locations but the overall intake that I get from the discussion is that not many tenants are willing to commit to longer-term lease (note rules in the US they cannot break lease), which MUST see it sort of an opportunity because they could then also wait for the pandemic to play out, then secure a better rental reversion once vaccines are rolled out in the 2nd half of the year and outlook looks better.

As an investor myself, I think I was overall pleased with how the management is always trying to remain transparent and provide more value to investors. If I had to be very skeptical about some things, it would be because the external factors such as US Treasury Yield going up is not within their control, and they could catch themselves trying to get potential acquisitions in 2021 venturing into new territories such as the Business Park which many investors in Singapore (including myself) are not familiar with.

The management would nevertheless ensure that any deals made would be value-adding to both the REIT and investors so this is one aspect that I think investors can rely on while keeping a closer look at further development.

Thanks for reading.

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11 comments:

  1. Hi Brian, many thanks for sharing the above...appreciate! Glad to hear the good news on potential new acquisition target of US Business Park. Hope the bad debt provision will no longer be required.

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