One of my core positions in my portfolio – Manulife US REIT (MUST) – reported its latest FY2019 results yesterday morning. Having gone through the announcement materials and attended a media briefing for the REIT, I thought I’ll share a TLDR summary on its latest quarter and management commentary on certain aspects of the REIT.
Adjusted DPU fell 1.3% y-o-y
While the headline DPU states that increased by 7% YoY, the adjusted DPU tells a different story. Adjusted DPU fell 4.6% in 4Q 2019 and 1.3% YoY.
Net Property Income up 22.2% y-o-y
Net property income increased from 22.2% largely off of acquisitions, with weakness in Michelson as seen here.
Michelson and acquisition timing drags on results
Coming off of a successful preferential offering and inclusion into the FTSE EPRA Nareit Global Developed Index in the 4th quarter, hopes were high for a good set of results to round off a phenomenal year for the REIT. Unfortunately, the results was not ideal as you can see in the DPU and NPI presented.
Management represents that this is due to these issues:
- Marked down to market Michelson lease renewals during the year
- Increased vacancy during Q4 for Michelson
- Latest acquisition only closing in late October
Michelson mark to market leases
Some market leases were marked to market this year in Michelson, resulting in a drop in NPI year over year.
This phenomenon is common when leases are very long and with fixed step ups. This can create a big divergence between market rent and lease rent. In this case, Michelson’s leases have run ahead of market rent. This results in significant negative rental reversions on renewal this year.
Increased vacancy during Q4
Michelson occupancy fell from 96% in Q3 to 90.1% in Q4. Management represents that a previous tenant had vacated the premises in October with no replacement.
On the analyst call, management mentioned that a tenant had already been lined up to take over the space and the agreement was pending signing. Management backed out as the tenant was one of the largest co-working operators in the world.
*cough* WeWork *cough*
Management was concerned with its credit worthiness due to its high profile financial troubles.
As such, it resulted in a drop in occupancy during the quarter of almost 6% in Michelson. Management is currently looking to fill the space and represents that there are already some prospects looking at the space.
Latest acquisition only closing in late October
The last effect relates to the recent acquisition of Capitol completing in end October while new units issued is entitled to the entire quarter’s distributable income.
As such, there is a dilution effect as Capitol only contributed income for 2 / 3 months while the enlarged unit base is entitled to all 3 months of income. This effect should normalise in the next quarter.
Rental Reversion at 12.1% (excluding Michelson)
Leasing momentum in the REIT remained strong. Rental reversion of 12.1% for existing leases excluding Michelson is quite impressive.
If Michelson is included it would drop to 0.5%.
Semi-annual reporting coming soon
I asked about whether and how MUST would adopt semi-annual reporting. Management has already put a resolution to the board and it should be adopted going forward once SGX clarifies certain rules.
Interestingly, the Investor relations team is thinking of replacing reduced reporting contact with other investor education activities, which I think is particularly helpful for investors who are unfamiliar with the US real estate market.
Index inclusion drives re-rating
As mentioned earlier, MUST joined the FTSE EPRA Nareit Global Developed Index in December. If you’re wondering why index inclusion is so desirable, my friends over at Probutterfly has taken a look at it using MUST as a case study. It plays in to my point on Why size matters for REITs.
Do check it out if you want to know more.
My thoughts
On the REIT’s performance
One thing I’ve always been impressed about Manulife US REIT’s Management and Investor Relations team has been their candor and willingness to engage with investors, something I wish other REITs would emulate. It was part of why I was willing to give them a shot when I invested in early 2019.
While the results was a tad disappointing at first glance, I feel the reasons given are reasonable. For now, I’m willing to give them the benefit of doubt and continue to observe the REIT. The next reporting period will be crucial to see if they can continue to deliver on their promises.
On current valuation of MUST
With a DPU of about 6c and NAV of 80c, MUST has a trading yield of 5.8% and a price to book of 1.3. I would say they are trading at a premium valuation. I personally won’t look to add to my position, however it would be conducive for…
On potential acquisitions
Given the way the analyst call and media briefing was conducted, I get the sense that we can expect another acquisition soon, maybe in 1H2020. Given the favourable cost of equity, I think this would make sense as well.
Of course, this is pure speculation and may not come to pass.
What do you think of Manulife US REIT’s latest FY2019 results? Do let me know your thoughts.
Happy Hunting,
KK
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