Is Manulife US Real Estate Investment Trust Attractively Priced Right Now?
Manulife US Real Estate Investment Trust (SGX: BTOU) is the first pure-play U.S. office real estate investment trust (REIT) in Asia. It was listed here in May 2016 at a price of US$0.83. The REIT’s sponsor is Manulife, which is part of a leading Canada-based financial services group.
Currently, Manulife US REIT’s units are changing hands at US$0.835 each, just above the initial public offering price (IPO) of US$0.83. At that price, is there value in the REIT? Let’s find out.
The book value or net asset value (NAV) is the difference between a REIT’s assets and its liabilities. By dividing the current unit price of a REIT by its book value, we get the price-to-book (PB) ratio. A PB ratio of below 1 could mean the REIT is undervalued.
As of 30 September 2018, Manulife US REIT had a NAV per unit of US$0.82. At its unit price of S$0.835 right now, it is selling at a price-to-book ratio of a tad above 1, or 1.02 to be exact.
REITs are obligated to pay out at least 90% of their taxable income to unitholders, known as distributions, to enjoy tax benefits. Thus, REITs provide a steady income for investors. Similar to dividend yields for companies, REITs can be valued using distribution yield. Distribution yield is simply the distribution per unit (DPU) paid for the year divided by the current unit price multiplied by 100%.
For the trailing twelve months, Manulife US REIT has declared a DPU of US$0.0546. Based on its latest unit price of S$0.835, the REIT is selling at a distribution yield of 6.5%.
Manulife US REIT’s portfolio contains seven freehold and Class A office properties. 95% of the leases from the assets have built-in gross rental income escalations. 56% of the contracts have yearly rental escalations which average around 2.6% while 39% have mid-term or periodic rental increases. The built-in rental escalations provide the REIT with predictable rental income, which could translate to steadily increasing DPU.
In December 2018, Manulife US REIT updated the market that it expects the new proposed tax regulations in the US not to have any material impact on its consolidated net tangible assets or DPU. Previously, Manulife US REIT said that the maximum downside risk to DPU could be as much as 15%. Having said that, we will only know for sure what the final regulations under Section 267A look like when they are released by 22 June 2019.
The Foolish takeaway
I believe Manulife US REIT has brighter days ahead due to a positive economic outlook in the US and a low unemployment rate of 3.7% in the country. I also do not expect much impact from the final tax ruling from the US. At a PB ratio of 1 and a distribution yield of close to 7%, Manulife US REIT looks attractively priced to me.
This content was originally published here.