Manulife US Real Estate Investment Trust (SGX: BTOU) reported its full-year 2018 earnings this morning. As a quick introduction for context, Manulife US REIT is the first pure-play US office REIT in Singapore’s stock market. The REIT’s portfolio consists of seven prime freehold office buildings in the US with a collective net lettable area (NLA) of 3.7 million square feet and a valuation of US$1.7 billion as at 31 December 2018.
Here are 11 key observations from Manulife US REIT’s latest earnings report:
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1. Gross revenue was up 38.4% year on year in the fourth quarter of 2018 to US$40.5 million. Net property income (NPI) grew by the same magnitude from US$18.4 million a year ago to US$25.5 million. The growth in gross revenue and NPI were mainly due to the acquisitions of two office assets (Penn and Phipps) in June 2018 for US$387 million.
2. The REIT’s adjusted distribution per unit (DPU) for the reporting quarter was 1.54 US cents, an increase of 1.3% from 1.52 US cents a year earlier. There was a lower rate of growth in DPU compared to NPI in 2018’s fourth quarter because of an enlarged unit base resulting from a preferential offering (for the acquisitions of Penn and Phipps) and a rights issue (for the acquisition of Exchange in late 2017).
3. Manulife US REIT’s portfolio had a weighted average lease expiry (WALE) of 5.8 years and an occupancy rate of 96.7% as of 31 December 2018. The REIT has just 5.5% of leases by gross rental income expiring in 2019. During 2018, 16 leases – amounting to 4.9% of the net lettable area of the REIT’s portfolio – were signed at an average positive rental reversion rate of 8.9%.
4. Manulife US REIT’s net asset value (NAV) per unit was stable at US$0.80 at end-2018 compared to 2017. For the whole of 2018, the REIT’s DPU was 6.05 US cents. At Manulife US REIT’s unit price of US$0.855 right now, it has a trailing distribution yield of 7.1% (a REIT’s dividend is known as its distribution).
5. As of 31 December 2018, the REIT’s gearing was at 37.2%, which is fairly high compared to the regulatory gearing ceiling of 45% for Singapore’s REITs. But, Manulife US REIT still has some room to take up more debt if it wishes. The REIT’s weighted average debt maturity was 2.7 years at end-2018, while its weighted average cost of debt is manageable at 3.27%. 98.6% of the REIT’s debt is on fixed-rate loans, which helps to mitigate any increase in borrowing costs in the event of rising interest rates.
6. Around 94% of the REIT’s leases have built-in rental escalations at the end of 2018. 55.3% have annual rental escalations averaging around 2.5% per year, while 38.8% have mid-term or periodic rent increases. The rental escalation terms help to ensure that changes to the REIT’s rental income from tenants can keep up with long-term inflation.
7. Hyundai’s 97,000 square feet lease in Michelson was renewed in January 2019. Around 60.7% of Manulife US REIT’s total leases by NLA expire on 2023 and beyond.
8. The REIT’s Manager is conducting asset enhancement initiatives (AEIs) on two properties: Figueroa and Exchange. For the former, up to US$8 million has been budgeted to spruce up the property’s lobby and gantries and to install a new cafe. For the latter, US$12 million has been allocated for new flooring, glass features, and LED lighting. The AEIs should be completed by the fourth quarter of 2019 and first quarter of 2020, respectively, and make the buildings more attractive for tenants.
9. Jill Smith, the chief executive officer of Manulife US REIT’s Manager, shared the following comments on the REIT’s prospects in the latest earnings update:
“We remain confident of the growth in the world’s largest real estate market, and are delighted to see U.S. REITs seeking SGX listing and Singapore corporates expanding into the U.S. alongside us. We continue to distinguish ourselves through our high-quality portfolio of Trophy and Class A assets, which will provide strong income in up-cycles and remain resilient during down cycles as compared to Class B and lower class business park properties. Moving into 2019, we will drive leasing and seek acquisitions opportunistically in strong growth markets.”
10. In late 2018, authorities in Barbados and the US proposed changes to their tax regulations. Manulife US REIT does not expect the proposed changes to have any material impact on its distributions and net tangible assets. But, the proposed changes in the US have yet to be finalised, so there could still be shifts in the situation. Manulife US REIT will update the market accordingly if any new information that bubbles up could materially impact its financial numbers and/or business.
11. In all Manulife REIT has posted a respectable performance and grew its DPU due to acquisitions of quality assets in the US. Moving forward, the US market outlook is positive with GDP growth of 3.4% in 2018’s third quarter and a low unemployment rate of 3.9% in December 2018. Leasing activity in the US office market continues to be healthy and rents increased nearly 3.0% over the last 12 months.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in any companies mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing Chong Ser Jing does not own shares in any companies mentioned. The Motley Fool Singapore has a recommendation for Manulife US Real Estate Investment Trust.