MANULIFE US REIT: A Play on Vibrant Office Demand

CEO of Manulife US Real Estate Management, Jillian Smith (Photo: Company)

In her earliest memories, bedtime stories for Jillian Smith were less about whimsical fables or enchanting tales, and more to do with equity markets, share prices, and the salmon-pink pages of the Financial Times.

"When I was eight, my usual bedtime reading with my father involved poring over pages of the FT and checking stock prices," recalled Smith, the Chief Executive Officer of Manulife US Real Estate Management Pte Ltd, which is the manager of Manulife US REIT.

Manulife US Real Estate Investment Trust, which made its trading debut on SGX about six months ago, is the first pure-play US office REIT to list in Singapore and Asia.

Smith's initiation into the world of investing took place against the backdrop of her grandfather's riches-to-rags saga in the 1930s, which became a cautionary tale for the family.

"My grandfather lost his personal fortune during the Great Depression due to an over-concentrated equity portfolio, but my great-grandfather was savvier, and had a more diversified portfolio."

There was constant chatter in the family about how to invest wisely. "As a result, I've always been intrigued by how stock markets work from an early age," she added.

When Smith was sent to boarding school at 11, reading the FT was a daily staple. "My father and I had this habit of checking stock prices in the FT, and at boarding school, I continued to do that during my morning breaks, in the playroom. This extended all the way into adulthood, when I started my first job as an investment analyst in an insurance company."

"And the rest is history!" she added with a laugh.

Smith, who graduated from UK's Durham University with a Bachelor of Arts Honours in Sociology and a post-graduate Certificate of Education, has more than three decades of experience in investment management. During her career, she managed Asian and Japanese equity strategies for unit trusts, pension funds and other institutional portfolios in various roles with firms such as Lazard, Rothschild, Legg Mason and Henderson.

She also held several senior executive positions with Manulife Asset Management before being appointed CEO of Manulife US REIT in July 2015.

The three properties in our portfolio are located in cities with higher growth than the national average, and each of these local economies possesses a dynamism of their own.

- Jillian Smith
CEO

Manulife US Real Estate Management

Looking ahead, acquisitions will be the next driver of growth for the REIT. It targets one asset purchase per year, with a price tag of US$100 million to US$150 million, Smith said.

"The US market is the largest market in the world by far - the choices and opportunities are mind-boggling, phenomenal even."

Through such acquisitions, the REIT aims to diversify geographically - away from California where it already has two properties - and broaden its tenant base. Each addition to its portfolio should be accretive.

"We have a threshold at which it would be accretive - our portfolio yield is around 6.8% to 7%, depending on the share price, so a potential asset has to yield more than that for it not to be dilutive for investors," Smith said.

"We also need to structure the deal with optimal debt and equity to ensure it's accretive overall."

The REIT has two ways to acquire - through its sponsor, and through its acquisitions team.

The sponsor - The Manufacturer's Life Insurance Co - is part of the Canadian-based Manulife group, with over US$736 billion in assets under management and administration as at 30 September 2016.

The sponsor's parent, Manulife Financial Corp, is listed on four bourses, including the Toronto Stock Exchange and New York Stock Exchange. It has a market capitalisation of about C$37.0 billion.

"Manulife has a long 70-year history in property - it has a substantial acquisitions team that sees about US$20 billion of ideas a year, and some of that gets filtered down to us," she said.

"With such a vast array of potential deals, we need to be incredibly selective. At the same time, there's extremely stiff competition in the market."

Smith said the REIT's focus on the US commercial real estate market is sacrosanct. "That will not change. Our mission is to bring diversification, value, and the excitement of the US office property sector to investors here in Asia."

Looking back on Manulife US REIT's successful IPO on the Singapore bourse, nearly a year after it deferred its first listing attempt, Smith remembers the euphoria and the angst vividly.

"For me, this was a new area of focus and a new challenge in terms of the product. Following its failed launch last year, we struggled a lot - we were thinking, 'Could we? Should we? Would we?"

"So the day of the REIT's listing was the most exhilarating day of my career - it was simply the most exciting thing that I had ever done," she beamed.

"Because this is a public company, this is the sharp end, we're on the sharp end. The most important thing is to do right by the unit holders - I, along with the directors, are guardians of their interests, and we take that responsibility very seriously."

And these are the principles - commitment, professionalism and determination - that number among Smith's defining traits. "I guess I'm old-fashioned that way," she smiled.

"Integrity is paramount in everything you do, and totally essential in building credibility and trustworthiness. It's not just words, but your deeds as well."

By extension, Smith, 62, hopes to inculcate values such as resilience, optimism, passion and courage in the younger generation.

"Young people need to be humble and ditch their egos - I've noticed this terrible sense of entitlement in Singapore youth. They need to develop a sense of humour, and keep things real," said the mother of a 23-year-old son, who recently graduated in the UK with a law degree.

An avid skier, Smith counts Edith Wharton and Ian McEwan among her favourite authors, and is reading Leo Tolstoy's War and Peace. She also enjoys listening to British singer-songwriter Adele and jazz vocalist Amy Winehouse. "Music grabs your soul - and together with the lyrics, they tell a story," she added.

But it's during the wee hours that the self-confessed insomniac is at her best.

"I use the time when I'm unable to sleep as my deep-thinking time, or for self-therapy, to sort out practical problems and gain perspective," she said.

Issues that weigh on her mind include Manulife US REIT's leases, collaboration among the team, communication with investors, and its growth path.

"I sometimes dream about our future acquisitions," she admitted with a laugh.

"As Jay Z once said, 'Dream big, be unrealistic'. That's what we need to do - we want to dream big for our REIT."

With respect to the three markets that Manulife US REIT has invested in, JLL's 3Q 2016 Office Outlook report indicates the following:
• Atlanta - Rental rates have increased in each of the last 10 quarters and posted an all-time high in 3Q. Direct vacancy has reached a 14-year low, spurred by strong absorption and a dearth of new construction.
• Los Angeles - 3Q leasing activity pointed to strong tenant renewal activity. Year-to-date sales volume is more than twice that of 2015, as investors increasingly recognise Los Angeles' underlying strengths and the region's affordability as a gateway market.
• Orange County - Leasing activity during the quarter was concentrated in small and medium-sized deals, but the market continued to generate positive absorption. Rental rates have increased substantially over the past few years, but remain below the 2007 market peak.

• Manulife US REIT may be adversely affected by economic and real estate market conditions, as well as changes in regulatory, fiscal and other governmental policies in the US.
• The REIT is subject to the risk of non-renewal and non-replacement of leases, and decreased demand for office space. The REIT's ability to make distributions to unit holders may be adversely affected by increases in direct expenses and other operating expenses.
• The REIT may face risks associated with debt financing and the Bridge Loan Facilities, the Third Party Facilities and the debt covenants could limit or affect the REIT's operations.
• Manulife US REIT may be exposed to risks associated with exchange rate fluctuations and changes in foreign exchange regulations.