Manulife US Real Estate Investment Trust’s Distribution per Unit for the Latest Quarter Falls 9.7%

Manulife US Real Estate Investment Trust (SGX: BTOU), a pure-play US office real estate investment trust (REIT), reported its second-quarter earnings on Monday, 6 August. During the quarter, the trust issued a preferential offering to raise funds for two new properties — Penn and Phipps. The larger unit base, consequently, caused distribution per unit (DPU) to decrease by 9.7%.

Financial results

Boosted by recent acquisitions of Penn and Phipps, which brought its total portfolio count to seven properties, gross revenue for the April-June period increased 63.4% to US$32.5 million. Net property income rose 9.3% to US$20.4 million while distributable income increased 65.3% to US$16.5 million.

But more importantly, distribution per unit declined 9.7% to 1.3 US cents from 1.44 US cents. As mentioned above, this was due to the enlarged unit base. The trust issued 227.9 million units in June this year and had a rights issue of 299.2 million units in October last year. These offerings, which were issued to fund acquisitions, had a net dilutive effect on distribution per unit.

Over the first half of the year, DPU dropped 14.2% to 2.53 US cents from 2.95 US cents.

However, it is worth noting that the second quarter of 2018 only included nine days of income contribution from Penn and Phipps as the acquisitions were only officially completed on 22 June. The REIT’s results for the next quarter will give a better picture of the net impact of the recent acquisitions on DPU.

Higher gearing ratio

Besides the dilutive impact of the rights issue, the trust also increased its debt load to fund the acquisition of Penn and Phipps. As of 30 June 2018, it had borrowings of US$658 million and assets valued at US$1,723.7 million, which translates to a gearing ratio of 37.3%. This is up from 34.1% recorded on 31 March.

That said, the gearing is still below the regulatory cap of 45%. The REIT also had a safe interest cover of 4.8 times. Furthermore, 100% of its debts are on fixed rate, which mitigates the risk of interest rate hikes.

Book value

The REIT reported a slight increase in its adjusted net asset value per unit to US$0.80 from US$0.79 in March. The higher book value per unit was because of the new acquisitions.

Its portfolio valuation also increased by 1.4% to US$1,723 million. Its properties had an average price per square foot of US$461, with capitalisation rates of 5.3%.

Portfolio updates

As of 30 June, 93.9% of leases had annual rental escalations, which will provide the trust with visible organic growth. Below is a chart illustrating the lease contracts with rental escalations:

Source: Manulife US Real Estate Investment Trust 2018 Q2 Earnings Update

In addition, the trust signed three new or renewed leases during the quarter for an average 7.2% positive rental reversion.

Looking ahead

In the next quarter, investors will see the full revenue contribution from its recent acquisitions, Penn and Phipps. On average, the trust’s portfolio has 2.1% rental escalation per annum, which will continue to provide visible organic income growth for the next few years.

However, with its gearing nearing the 45% regulatory limit, it could be difficult for the REIT to make more debt-funded acquisitions to boost unitholders’ DPU in the near future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.