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Manulife US REIT – Estimating the Forward Dividend Yield After Acquiring 500 Plaza Drive and 10 Exchange Place

Manulife US REIT announced their 3rd quarter 2017 results last week.

The 3rd quarter result factored in some of the rental earnings they earned from the acquisition of 500 Plaza in the New Jersey Suburbs.

There have been quite a fair bit of activities with Manulife, so it might be rather challenging to visualize what is the dividend yield when all these acquisitions are accounted for.

This is my short notes on that.

Recall that there have been 2 major purchases:

  1. 500 Plaza Drive by way of share placement to institutional investors and small amount of debts. Property is valued at US$116 mil
  2. 10 Exchange Place by way of a rights issue of 300 new units at US$0.695 and probably US$124 mil in debt. Property is valued at US$330 mil

500 Plaza Drive was purchased on 20 July, and so the 3rd quarter result shows 70 days of rental income attribution to this property. We could probably annualized the net property income for this property.

From the presentation slides of the acquisitions for both Plaza and Exchange, we can see 220 days worth of pro forma rental income.

The above pie charts are taken from the acquisition slides for 500 Plaza Drive.

The proforma full year NPI is likely to be US$8.8 mil. This give it an NPI yield of 7.6%.

The above pie charts are taken from the acquisition slides for 10 Exchange Place.

The proforma full year NPI is likely to be US$16.25 mil. This give it an NPI yield of 4.88%.

In the circular provided during the 10 Exchange Place acquisition, there are some proforma forecasts. The NPI for Plaza and Exchange is US$6.8 mil and US$14.4 mil respectively.

These figures are much lower than those in the slides.

The table above shows 2 sections.

The top section is the financial results from the first 3 quarters that was announced.

The bottom section are the estimated net property income, management & trustee fees, interest expense and tax for the 2 acquisitions.

The acquisitions increases the rental income, but more interest, management fees are incurred as well.

However, because Manulife US REIT pay majority of its management and trustee fees by way of issuing units, the income available for distribution is less affected by the management fees for now.

To derive a cash flow that is close to what Manulife US REIT can distribute, we take NPI  – taxes – interest expense.

For 500 Plaza, I used US$8.1 mil, which is the difference between Q3 and the average of Q1, Q2 results. This falls between the US$6.8 mil in the circular and the US$8.8 mil in the slides.

For 10 Exchange Place, I used US$14.4 mil, which is the figure from the circular, the lower conservative amount as compared to the $16.25 mil in the slides.

We derive a US$63.9 mil in income available for distribution.

Based on the new number of shares outstanding, the dividend yield at US$0.905 share price is 6.86%.

This figure is a forecast, and it very much depends on the actual figures for both Plaza and Exchange going forward.

Positive Risk Impact: 10 Exchange Place Below Market Rent

Most of Manulife US REIT is not expiring soon. Michelson has some 35% expiring in 2019. Other than that the opportunity seems to be in 10 Exchange Place’s expiry.

Passing rent of 10 Exchange Place is 21% below market rent.

Assuming expired tenancy can be brought level to market rent, the boost to overall NPI:

  1. 2017: 0.06 x 14.4 mil x 0.21 = 0.18 mil (1.25% growth for 10 Exchange)
  2. 2018: 0
  3. 2019: 0.12 x 14.4 mil x 0.21 = 0.36 mil (2.5%)
  4. 2020: 0.065 x 14.4 mil x 0.21 = 0.196 mil (1.36%)
  5. 2021: 0.132 x 14.4 mil x 0.21 = 0.40 mil (2.78%)

The growth overall is not significant.

Since 10 Exchange contribute 21% of the overall NPI, the overall growth impact is:

  1. 2017: 0.26%
  2. 2018: 0%
  3. 2019: 0.525%
  4. 2020: 0.285%
  5. 2021: 0.584%

The impact is not going to be significant.

Attractive Tax Considerations for Foreign Investors

While re-reading a DBS Vickers report on Manulife US REIT, I found a paragraph to be rather interesting.

Now when you are a non-resident investor holding some foreign shares, the home country usually will tax money flowing out of their country. This is called the withholding tax.

Some examples are if you are a Singaporean investing in USA, the dividend withholding tax is 30%. If you are an entity in Singapore, say EC World REIT with assets in China, when you take business money out, the tax is 5%.

If you are a non-resident of Singapore, and you invest in a Singapore REIT, if you are an individual, there currently is not withholding tax on your dividends.

However, if you are a non-resident company, and you invest in a Singapore REIT, there is a 10% withholding tax.

The paragraph above makes it clear that for unit holders of Manulife US REIT, the income that they received from the REIT will not be subject to further income tax, or dividend withholding tax.

These tax rules where the foreign or local sourced income received for Singapore REITs is not subjected to Singapore Tax is not permanent, but evaluated every 5 years.

But it seems Manulife US REIT, was able to get an agreement with the IRAS, the tax authorities of Singapore to ensure this is long term.

It makes sense for them, because if you came all the way over here to list, and in 4 years time the government decides that you have to pay withholding tax because your income is sourced from USA, then it will kill your business model.

The biggest benefit to me benefits the non-resident companies that invest in Manulife US REIT, because for other companies they have to pay a 10% withholding tax.

For example, Capitaland Mall, owns Capitaland Retail China Trust. The dividends they received from Capitaland Retail China Trust was subject to this 10% withholding tax.

Having this tax benefit, together with its higher income available for distribution yield versus the USA REITs, might make it attractive for non-resident companies to participate and hold Manulife US REIT for a good cash flow.

Of course, if these tax benefit are removed, this could be catastrophic. To be fair, this can be said for many REITs, or companies, as it is something they have little control over.

It just will affect businesses whose attractiveness to investors is that they distribute a large amount of their income to their investors.

This article is part of my series of article on REITs. You can polish your competency in REITs for FREE by visiting my REITs Training Center, where I deconstruct the various nuances of REIT investing.

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