Reit dreams are made of these: more acquisitions

Ms Jillian Smith, CEO of Manulife US Reit, says the US market is the largest in the world, and the choices and opportunities it offers are phenomenal.
Ms Jillian Smith, CEO of Manulife US Reit, says the US market is the largest in the world, and the choices and opportunities it offers are phenomenal.PHOTO: SGX

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," recalls Ms Smith, the chief executive officer of Manulife US Real Estate Management, which is the manager of Manulife US Reit.

Manulife US Real Estate Investment Trust, which made its trading debut on the Singapore Exchange (SGX) on May 20, is the first pure- play US office Reit to list in Singapore and Asia.

Ms Smith's initiation into the investing world 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 adds.

Ms Smith, 62, was appointed CEO of Manulife US Reit in July last year.

ROBUST DYNAMICS

Manulife US Real Estate Investment Trust (Reit) has a market capitalisation of US$521 million (S$745 million). The Singapore Reit - established principally to invest, directly or indirectly, in a portfolio of income-producing office real estate in key markets in the United States, as well as real estate-related assets - has seen a price gain of 4.4 per cent since its trading debut.

Manulife US Reit is among six SGX trusts categorised by the Global Industry Classification Standard as office Reits. Over the last six months, it was the second- best performer, with a total return of 8.2 per cent in Singapore dollar terms, behind CapitaLand Commercial Trust's 12 per cent total return.

The Reit's portfolio comprises three freehold office properties with an aggregate net lettable area of 1.8 million sq ft, valued at US$813.2 million as at Sept 30, 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 had a weighted average lease expiry of 6.1 years, an occupancy rate of 97 per cent and positive rental reversion of 8.5 per cent between January and September.

Ms Smith believes the trust's outlook remains healthy, based on the strength of its assets. "We're positive about the US commercial real estate market, and you've seen that borne out in the Reit's third-quarter results.

"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 its own."

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

"But if there's increased stimulus and more growth - as (US President-elect Donald) 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."

'MIND-BOGGLING'

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

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

It is through such acquisitions that the Reit aims to diversify geographically - away from California where it has two properties - and broaden its tenant base. Each addition to its portfolio should be accretive.

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

The sponsor - The Manufacturers Life Insurance Co - is part of the Canadian-based Manulife group, with more than US$736 billion in assets under management and administration as at Sept 30. The sponsor's parent, Manulife Financial Corp, is listed on four bourses, including Toronto and New York. It has a market capitalisation of about C$37 billion (S$40 billion).

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

She adds that 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 in Asia."

LOCKED IN

In terms of challenges, the biggest hurdle the trust faces is conveying the right message to investors, she notes. "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."

Ms Smith is unfazed about the widely anticipated hike in US interest rates, which could materialise as soon as this week when the Federal Reserve meets to decide monetary policy. As at Sept 30, 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 cent per annum.

This compares with an average interest rate of 2.80 per cent per annum and weighted average debt maturity of two years as at May 20. As a result, its gearing has fallen to 34.7 per cent at end-September from 36.8 per cent at end-December.

"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 adds, referring to Britain's vote on June 23 to exit the European Union that created shock waves across global markets.

'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, Ms Smith remembers the euphoria and the angst vividly.

An avid skier, she also 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 adds.

"I sometimes dream about our future acquisitions," she admits 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."

  • This is an edited excerpt from Singapore Exchange's Kopi-C: The Company Brew column that features C-level executives of firms listed on SGX. A longer version can be found on SGX's My Gateway website: www.sgx.com/mygateway.
A version of this article appeared in the print edition of The Straits Times on December 12, 2016, with the headline 'Reit dreams are made of these: more acquisitions'. Print Edition | Subscribe