JT 8.2016This article, written by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange), originally was published in SGX's kopi-C: the Company brew series on 9 December 2016. The article is republished with permission.



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.

LQM ad141eWhen I was eight, my usual bedtime reading with my father involved poring over pages of the FT and checking stock prices.

- Jillian Smith
CEO

Manulife US Real Estate Management

"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.


Robust Dynamics

Manulife US Real Estate Investment Trust (REIT), which listed on Singapore Exchange on 20 May 2016, has a current market capitalisation of US$521 million. The Singapore REIT - established with the strategy principally to invest, directly or indirectly, in a portfolio of income-producing office real estate in key markets in the US, as well as real estate-related assets - has seen a price gain of 4.4% since its trading debut.

Manulife US REIT is among six trusts on SGX categorised by the Global Industry Classification Standard (GICS®) as Office REITs. Over the last six months, it was the second-best performer, with a total return of 8.2% in Singapore dollar terms, behind CapitaLand Commercial Trust's 12.0% total return.

The REIT's portfolio comprises three freehold office properties with an aggregate net lettable area of 1.8 million square feet, valued at US$813.2 million as at 30 September 2016, up from US$799 million at end-December. These properties are Figueroa in Los Angeles and Michelson in Irvine - both in California, as well as Peachtree in Atlanta, Georgia. They have a weighted average lease expiry (WALE) of 6.1 years, an occupancy rate of 97.0%, and positive rental reversion of 8.5% between January and September this year.

Smith believes the trust's outlook remains healthy, based on the strength of its assets.

 

LQM000066

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

"We're positive about the US commercial real estate market, and you've seen that borne out in the REIT's third-quarter results," she said.

"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."

As of the third quarter of this year, Los Angeles, Irvine and Atlanta have registered a 12-month rent growth of 4.9%, 8.4% and 12.5% respectively, CoStar data showed. "For the next few years, it's going to be a landlord's market in terms of rental appreciation," Smith noted.

And however the US economy performs, the REIT is nestled in "a big sweet spot".

"If the economy goes to hell in a hand basket, we remain a high-quality investment with a substantial yield - we are almost bond-like in terms of our stability and resilience," she said.

"But if there's increased stimulus and more growth - as Trump is pro-growth - there will be more demand for office space, and that's also good for us. If you're talking about a jump in inflation and a faster pace of rate hikes, this is not an immediate scenario for us, and is at least one to two years away."

What's more likely to happen is slow and steady expansion in the US economy.

"We've had stable growth in the US, and that's likely to continue. It will not turn off overnight, nor will it go into a high-octane surge any time soon, which means we'll probably get a slow, upward trajectory in interest rates, which in turn will not put too much pressure on the markets," she added.

♦ 'Mind-Boggling'

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."

Manulife US REIT

Stock Price

S$1.181

Market Cap

S$742.3m

52-week High Low

$1.124-$1.231

Price/Book

1.063

PE

19.871

Source: SGX StockFacts
(data as of 13 Dec 2016)

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."


Locked In


In terms of challenges, the biggest hurdle the trust faces is conveying the right message to investors, she noted. "The REIT is something very new, and the issue is how do we ensure investors understand what we're doing? For most people, America appears to be very far away."

Smith is unfazed about the widely anticipated hike in US interest rates, which could materialise as soon as next week when the Federal Reserve meets to decide monetary policy. As at 30 September 2016, Manulife US REIT had gross borrowings of US$296 million, weighted average debt maturity of four years, and an average interest rate of 2.46% per annum.

This compares with an average interest rate of 2.80% per annum and weighted average debt maturity of two years as at 20 May 2016.

As a result, its gearing has fallen to 34.7% at end-September from 36.8% at end-December.

"In our recent refinancing, we were extremely fortunate to have locked in an average four-year tenor at 100% fixed rate of 2.46%, and reduced our interest expenses by US$1 million per annum," Smith said.

PeachtreeManulife US REIT portfolio asset, Peachtree, is a Class A office building in the heart of the Midtown submarket of metropolitan Atlanta. (Photo: Company)
"The deal was an absolute triumph for the team. Brexit was like a gift to us - we could not have foretold how much of a positive impact that event would have had on our debt negotiations," she added, referring to Britain's vote on 23 June to exit the European Union that created shock waves across global markets.

The REIT's next refinancing will be in 2019. "Our debt will roll over in three years, and comes with one-year extensions on favourable terms," she said.

"Relative to the Singapore REITs, which may feel the pressure of an expected hike in rates, we believe we're in a better position."

 

♦ 'Sharp End'

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."

LQM ad141eYoung 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.

- Jillian Smith
CEO

Manulife US Real Estate Management

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."



Financial results

Year ended 31 Dec
(US$ 000)
FY2015 FY2014 FY2013
Gross Revenue 70,945 70,048 69,845
Net Property Income 44,163 43,470 43,361
Net income after tax / fair value adjustment 25,971 24,006 22,859

 

Period from 20 May to 30 Sep 2016 (US$ 000) Actual Forecast* % Change
Gross Revenue 28,196 28,508 -1.1
Net property income 17,603 17,339 1.5
Net income for period 33,720 9,468 256.1
Distribution per unit (DPU cents) 2.01 1.90 5.8

 

30 Sep 16 31 Dec 15
Gearing Ratio 34.7% 36.8%
Interest Coverage Ratio 5.2 times 4.0 times
Weighted Average Debt Maturity 4 years 2 years


*The prospectus disclosed an eight-month profit forecast for the period 1 May 2016 to 31 December 2016. Forecast results for the period from the listing date to 30 September 2016 were derived by pro-rating the forecast figures and adjusting the anticipated lease incentives of Manulife US REIT for the period 1 May 2016 to 31 December 2016 as disclosed in the prospectus.


Source: Company data, IPO prospectus



Brokers' Ratings

Buys 4
Holds 0
Sells 0
Consensus
price target
US$0.88

Data: StockFacts




Outlook & Risks
      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.
In terms of risk factors:
    • 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.
With a portfolio occupancy of 97.0% based on committed leases and weighted average lease expiry of 6.1 years as at 30 September 2016, and no lease expiry in the next quarter, the Manager expects the portfolio to deliver a stable performance.

Going forward, the Manager will be focusing on asset, lease and capital management and actively seeking investment opportunities that deliver long term value to unit holders.


Manulife US REIT

Manulife US Real Estate Investment Trust is the first pure-play US office REIT listed in Asia. It is a Singapore REIT established with the investment strategy principally to invest, directly or indirectly, in a portfolio of income-producing office real estate in key markets in the US, as well as real estate-related assets.

Listed on SGX on 20 May 2016, Manulife US REIT's initial portfolio comprises three prime, freehold and Class A or Trophy quality office properties strategically located in Los Angeles, Irvine in Orange County, and Atlanta. The Manager of the REIT is Manulife US Real Estate Management Pte Ltd, an indirect wholly-owned subsidiary of the Sponsor.

The Sponsor, Manulife, is part of a leading Canadian-based financial services group with principal operations in Asia, Canada and the United States. The Sponsor operates as John Hancock in the US and as Manulife in other parts of the world, providing a wide range of financial protection and wealth management products. Assets under management and administration by Manulife and its subsidiaries were approximately US$718 billion as at 30 June 2016. Manulife Financial Corporation is listed on the Toronto Stock Exchange, the New York Stock Exchange, the Hong Kong Stock Exchange and the Philippine Stock Exchange.

The company website is: www.manulifeusreit.sg

Click here for the company's StockFacts page.


For its results for the period from 20 May to 30 Sep 2016, click here.

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