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Manager of Manulife US Reit upbeat about fundamentals

Manulife's global chief economist says there are few indications at present that the US economy is overheating

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Manulife US Reit organised an event for over 60 of its high net worth unitholders, which included a talk on the US economy by global chief economist, Megan Greene.

Singapore

ANXIETIES over rising interest rates and the US-China trade war are weighing on Manulife US Reit's price performance this year, but the Reit's manager remains upbeat on its prospects.

Units in the pure-play US office Reit closed at 80 US cents on Tuesday, up half a cent from Monday, but lower than its initial public offering (IPO) price of 83 US cents.

"I see this as sentiment driving down the price, and not fundamentals," said Jill Smith, chief executive officer of the Reit's manager. At the current unit price of 80 US cents, "we're seeing deep value in this counter".

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She went on to highlight that year-to-date, Manulife US Reit has been trading at an average price-to-book of close to 1.1 times owing to growth expectations in the US office sector, vis-a-vis the 0.9 times price-to-book by the Singapore office Reits.

Ms Smith added: "Now that our price is slightly below book and trading at a yield of 7 per cent for 2018, we feel that there is value in the stock."

She was speaking at an event on Monday that Manulife US Reit organised for over 60 of its high net worth unitholders, which included an update on the Reit's performance as well as a talk on the US economy by Manulife's global chief economist, Megan Greene.

For the second quarter ended June 30, the Reit's DPU - adjusted for an enlarged unit base due to a preferential offering - rose to 1.53 US cents from 1.45 US cents a year ago, while net property income increased 59.3 per cent to US$20.38 million.

As at June 30, its portfolio had an annual rental escalation of 2.1 per cent and registered a positive rental reversion of 7.2 per cent. Portfolio occupancy clocked 96 per cent, with a weighted average lease expiry (WALE) of 6.3 years.

Its portfolio of seven class A office assets are in major US cities such as Washington DC, Los Angeles and Atlanta.

Ms Smith added: "We will continue to look for other acquisitions but they have to be stellar . . . accretive acquisitions."

As at June 30, the Reit's gearing ratio stood at 37.3 per cent, with 100 per cent fixed-rate debt - which it says will help mitigate the interest rate hikes - and an average debt maturity of 3.2 years.

Meanwhile, in her presentation, Ms Greene highlighted that there are few indications at present that the US economy is overheating. "I'm really not that concerned about a recession in the US for the next eighteen months or so," she added.

But there are some risks on the horizon that are worth keeping an eye on, she warned, such as corporate leverage amid rising interest rates, the impact of the trade war, as well as the strong greenback, which could hit emerging markets that have issued debt in US dollars.

Ms Greene expects the US Federal Reserve will limit rate rises to three times in total this year - over concerns that the yield curve will invert - with the third hike imminent.

Next year will likely see two rate hikes, she reckons, with the Fed constrained by the yield-curve and the strength of the US dollar. "I think (the Fed will) be forced to slow down their path," she said, adding that it was something worth watching.

At the same time, some countries in emerging Asia are likely to benefit from trade tensions. In the past, Thailand, Malaysia and Vietnam have benefited from tariffs.

On the other hand, countries such as Singapore, South Korea and Taiwan which are part of China's supply chain are expected to be worse off.

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