facebook3 Things to Like About Manulife US REIT's (SGX: BTOU) 2020 Financial Results
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3 Things to Like About Manulife US REIT's (SGX: BTOU) 2020 Financial Results

profileSudhan P

Manulife US REIT (SGX: BTOU) is the first pure-play US office real estate investment trust (REIT) listed in Asia and it invests in office properties in key markets in the US.

As of 31 December 2020, the REIT’s portfolio contained nine freehold and high-quality commercial properties located in California, Atlanta, New Jersey, Washington D.C., and Virginia.

Manulife US REIT’s portfolio boasts a well-diversified tenant base comprising blue-chip corporations and government agencies, such as Amazon, the US Treasury, and the United Nations.

On Monday, the REIT reported its financial results for the year ended 31 December 2020.

Distribution per unit (DPU), which is what investors look at ultimately, fell for the year.

However, looking beyond the headline number, there are some bright spots for the REIT.

With that, let’s look at three things that stand out from Manulife US REIT’s latest earnings.

1. Lower DPU But Excluding “One-Offs”, It Would Have Been Higher

Manulife US REIT’s 2020 gross revenue rose 9.3% year-on-year to US$194.3 million while its net property income increased by 4.6% to US$115.8 million.

The increases were largely due to contributions from two properties, Centerpointe and Capitol, that were acquired in 2019.

However, the growth was partially offset by lower rental income mainly from Michelson and Peachtree (due to higher vacancies), and lower car park income.

Manulife US REIT’s distributable income for the year grew 6.8%, but DPU tumbled 5.4% to 5.64 Singapore cents.

The lower DPU was mainly due to lower property income, provision for expected credit losses in the second half of 2020 from certain retail and F&B tenants, and enlarged unit base from equity fundraisings in 2019.

Manulife US REIT’s manager said that the REIT made the credit losses provision last year, but the retail tenant has reached an agreement to settle its arrears in 2021. So that’s good news.

During the 2020 results briefing, the REIT manager revealed that excluding this provisioning, 2020’s DPU would have been the same as the previous year.

Car parking revenue fell for 2020 as working-from-home (WFH) was prevalent.

However, the REIT expects this trend to reverse as bosses prefer a hybrid model (mix of both WFH and work-from-office) and returning office-users prefer driving to taking public transport. Excluding both the credit losses provision and lower car park income, 2020’s DPU would have been higher than the previous year.

Source: Manulife US REIT 2020 earnings presentation

2. Manulife US REIT Capitalising on Low Interest Rate Environment 

In 2020, the REIT re-financed its mortgages to take full advantage of the low interest rates.

Manulife US REIT also said that for 2021, it’s in advanced negotiations for a sustainability-linked loan due in the year, with cost savings expected.

Source: Manulife US REIT 2020 earnings presentation

As of 31 December 2020, Manulife US REIT’s gearing ratio was healthy at 41%, a distance away from the regulatory gearing limit of 50%.

Meanwhile, its weighted average interest rate was 3.2%, with around 95% of the gross borrowings on fixed interest rates, providing cash flow stability as compared to floating interest rate loans.

Manulife US REIT’s weighted average interest rate is expected to come down to around 2.9% with the sustainability-linked loan.

3. Manulife US REIT Portfolio Remains Strong With Growth Ahead

Despite the pandemic raging in the US, Manulife US REIT’s portfolio occupancy stood strong at 93.4%, above the US Class A average of around 84%.

It’s already capitalising on the post-COVID-19 themes with a 52% portfolio exposure to tech, online streaming, and cybersecurity.

Source: Manulife US REIT 2020 earnings presentation

Manulife US REIT’s weighted average lease to expiry (WALE) is also long at 5.3 years with minimal expiries in 2021. The REIT said that it’s in active negotiations with tenants on upcoming expiries.

WALE shows the number of years left for the rental of the REIT’s tenants to expire. Generally, the longer the WALE, the better it is for a REIT as it gives stability to the REIT’s income.

Manulife US REIT’s portfolio’s rental escalation stands at 2% per annum, giving the REIT organic growth. Majority of its leases, at 62%, have annual escalations averaging 2.6% per year.

On top of growing organically, Manulife US REIT is also looking to enhance its portfolio by having at least 20% of its tenants in high growth sectors, such as technology and healthcare, and business parks.

Furthermore, the REIT’s manager is exploring joint ventures and mergers and acquisitions to boost growth.

In the shorter term, it believes that the fast-paced vaccine roll out in the US will hasten economic recovery and enable business leaders to start making decisions on office leases. 

Manulife US REIT’s unit price closed on Monday at US$0.71. At that price, it had a price-to-book ratio of 0.97x and a distribution yield of 7.9%, which may attract income-hungry investors.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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