Manulife US REIT

There are 2 IPOs going on the market this week, one being the Manulife US REIT and the other another Oxley bond issue (5.15%, 4 years), since I've covered Oxley bonds before (here), I'm going to cover the Manulife US REIT, which is the first pure-play US REIT to be listed in Asia, which would make it a convenient way to diversify into US property. It is also listed in US dollars, but for the initial public offering here, investors will pay in Sing dollar ($1.138 per unit).

Looking at the pro forma financial statements, the P/E ratio of the REIT for 2015 is quite high at around 20 and unlike some local REITs, it has a negative fair value change. If we add don't count in the fair value change, it has a P/E ratio closer to 19. The P/E ratio seems quite high, especially if we compare it to the other listed REITs, but as mentioned before, some of the local REITs have a component rental support which they add to their income. Rental support is usually given by the seller of a property when a REIT acquires the property and is usually only for a few years after the acquisition, so it inflates the profits that the REIT makes from the property for the first few years and when the rental support is removed, the property may look like a bad investment (or at least a non yield accretive one). For the Manulife REIT, I don't see any component of rental support though, so this may be one of the reasons why the P/E ratio seems higher than other local listed REITs. Other than that, the REIT also has quite a high occupancy rate (96.5%) and around half of its lease expiration by cash rental income extends past 2021, but almost half of its tenants by net lettable area is law firms.

The balance sheet seems ok, with most of the assets in investment properties, which should be expected in a REIT. However, we should note that the assets are mainly in just 3 investment properties which is quite a small number, with 1 in Los Angeles, 1 in Irvine, Orange County and another in Atlanta. Since the REIT is heavily exposed to just these 3 properties, it may not be well diversified, so it might be a good idea to not put in too much money in this REIT alone. The debt to equity ratio is manageable at 60%.

The cash flow statement doesn't seem to reveal much other than the idea that the companies acquired its investment properties in the past year and that the company has issued units in the past (looks like the REIT just got started last year).

Other factors that we should consider when looking at the REIT would include the US property market and the exchange rate. The US economy seems to be recovering (although it may be affected by China's slowdown) and its unemployment rate has been decreasing. I think this would act as a boon to the US property market and the US property market is recovering/has recovered from the subprime mortgage crisis of 2007-2009. As for exchange rates, the MAS has set the nominal effective exchange rate policy band at 0 percent, while the US dollar may continue to strengthen given its improving economy, but exchange rates can be pretty unpredictable so I would take these with a pinch of salt.

The REIT doesn't seem a be a particular notable investment, but I think I'll be investing in a bit of the IPO as it provides the opportunity to invest in a pureplay US REIT, which is a good diversifier away from the local market.

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