SINGAPORE (Mar 25): Even as the Covid-19 outbreak threatens to wreak havoc on the US economy, analysts are optimistic that Manulife US Real Estate Investment Trust (MUST) will be able to weather the storm ahead.
DBS Group Research and RHB Group Research are keeping their “buy” calls on MUST, despite the counter plunging 48% from its peak in January to close at an all-time low of 55.5 US cents on March 23.
Interestingly, the counter jumped 26% to close at 70 US cents on March 24, after the US Federal Reserve swooped in with a sweeping rescue plan to shelter the US economy from the coronavirus.
DBS is keeping its target price at US$1.15, while RHB is lowering its target price by 21% to 88 US cents.
“Despite headwinds from Covid-19 outbreak to the US economy, we believe MUST office portfolio will be able to weather the crisis due to its diversified and good quality assets, strong tenant profile, and long weighted average lease expiry (WALE) of 5.7 years,” says RHB analyst Vijay Natarajan in a March 25 report.
He notes that MUST’s WALE is “among the highest in office REITs”.
In an investor call on March 24, the management said it hasn’t seen any increase in rental arrears or defaults.
Despite the business disruptions, tenants are contractually obligated to pay full rents, and also do not have the option to break their leases.
However, MUST added that it expects leasing activities to slow down progressively as existing and prospective tenants take a wait-and-see approach.
“Owing to current market conditions management expects leasing momentum to take a pause until some clarity emerges,” Natarajan says.
The analysts note that MUST’s portfolio comprises mostly Class A assets, which are typically more attractive and resilient during a recession.
“In addition, Class A assets tend to benefit from a potential flight to quality if rental rates look attractive,” says DBS lead analyst Rachel Tan in a March 25 report.
Tan notes that, even during the global financial crisis, occupancy rate at MUST’s Figueroa in Los Angeles was at close to 90% while Peachtree fell to close to 80%.
Both the DBS and RHB analysts also note that MUST has little to no debt refinancing concerns.
“Gearing remains modest at 37.7% and asset values have to fall by more than 16% to cause a breach in Singapore REIT (S-REIT) regulation,” says Natarajan.
“About 10% and 27% of its total debt is maturing in FY2020 and FY2021 respectively,” he adds.
However, Natarajan is lowering his distribution per unit (DPU) forecasts for FY2020 to FY2022 by 3% to 5% to factor in assumptions of lower rent growth and occupancy.
“As there is limited refinancing in FY2020, management does not expect any refinancing risks, but there could be some interest savings from lower interest rates,” Tan adds.
She also notes that MUST expects payout ratio and management fee in units to remain status quo, on the back of strong support from its sponsor.
As at 4.32pm on Wednesday, units in MUST are trading 4.3% lower, or down 3 US cents, at 67 US cents.
