In a sign that US economic recovery is well underway, Manulife US REIT (MUST) saw 270,000 square feet of leases since in the 1QFY2021 ended March, equalling that of its entire FY2020.
“The bulk of leasing demand came from renewals, mainly from the finance and insurance, administrative, advertising, and legal sectors. MUST has 4.4% of its gross rental income to be renewed in the remainder of FY2021F and another 13% in FY2022F,” report Lock Mun Yee and Eing Kar Mei, analysts at CGS-CIMB.
To that end, Lock and Eing, along with analysts from Maybank Kim Eng, PhillipCapital and RHB Group Research, have kept their respective ‘add’ and ‘buy’ ratings on the REIT, with target prices unchanged. CGS-CIMB and RHB’s target price stands at US$1 ($1.33), while Maybank Kim Eng’s target price stands at 87 US cents. OCBC Investment Research indicates a fair value of 82 US cents while PhilipCapital's target price is 84 US cents.
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Despite the positive leasing activity, that is not to say that MUST has been immune from headwinds, says RHB’s Vijay Natarajan. Management indicates that despite rising office demand, tenants are still cautious about signing new leases. Demand has chiefly been from the finance and insurance, administrative, advertising and legal sectors, says Chua Su Tye of MayBank Kim Eng.
Physical occupancy remains low at 5-25% and portfolio occupancy was down 1.4ppts q-o-q to 92% due to lower occupancy at its Michelson and 400 Capitol properties. The drop in occupancy was caused by "downsizing by a tenant in the lifestyle sector which returned one floor of space and non-renewal by a tenant who relocated to a suburban office", says Natalie Ong, research analyst at PhillipCapital.
But rent collection remains high at 98%, with abatement of 0.6% largely attributable to F&B tenants. MUST’s properties continue to trade above the US Class A average of 82.0% market occupancy.
Carpark income has thus taken a hit, says Ong of PhillipCapital. In FY2020, the counter experienced a 25% loss in carpark income as physical occupancy in offices fell to around 15%. FY2021 carpark income is seen to be in line with that of FY2020.
Gross rent reversions for leases signed was +2.1%, says Natarajan. However, tenant incentives have risen from 10-20% of total rent to around 25%, especially for long-term (5-10 years) lease renewals. More tenants, he observes, are still seen renewing typical 5-10 year leases, with portfolio average for in-place rents in line with market rents.
Just 4.3% leases by MUST’s diversified NLA are due for renewal this year. MUST has a long 5.3 year WALE, with 49.4% of its leases by NLA expiring beyond 2026. WALE for MUST’s top ten tenants - which contribute 36.3% of gross rental income - is likely higher at a projected 5.6 years, with expiring leases in FY2021-22 at 73% of NLA falling from 23.8% in 4QFY2020.
“While new supply is seen in Atlanta and Washington DC, its well-placed, trophy assets should help cushion occupancies in FY21E, even as 12-month projected rental growth is at -2.5%, as the post-Covid recovery finds a firmer footing,” says Chua. Natarajan sees the faster pace of vaccination being a catalyst of demand as workers return to work, though occupancy and rental pressures remain.
Balance sheet-wise, MUST’s net gearing is stable at 41.0% relative to the 41.3% in 4Q2020, though this is slightly high. It refinanced borrowings of $250 million due in FY2021, reducing interest costs to 3% from 3.18% and extending debt maturity from 3.3 to 3.4 years. Lock and Eing see the impact of interest cost savings to be felt in the coming quarters.
SEE:Manulife US REIT says portfolio 'remains stable' in 1Q21 operational update
MUST’s US$360 million debt headroom, says Chua, creates room for it to push into US “magnet cities” like the Sun Belt. He sees the firm eying larger deals like third parties and joint ventures in these growth areas to boost “high-growth tendencies” from 10% now to around 20%. The firm has been looking into acquisition opportunities since the start of the year, eyeing growth sectors like tech or healthcare should capital values fall significantly.
"According to CBRE, tenants in the tech, healthcare and life science sectors accounted for 31% of the leasing demand in 2020," says Ong of PhillipCapital. But such tenants only account for 1 in 10 of MUST's tenants, limiting its ability to increase rents.
“In terms of inorganic growth prospects, management indicated it would likely continue to look for opportunities, particularly in cities with growing tech presence and robust population growth fueled by job creation and lower cost of living,” Lock and Eing report.
"We see MUST as a beneficiary of recovery of US economy with its fast rollout of vaccines. We continue to like MUST’s resilient portfolio, quality tenants, stable income streams from built-in escalations and minimal lease expiry profile (4.4% of leases by GRI) in FY21 which could limit downside risk and help MUST ride over the market turmoil.," says OCBC equity researcher Chu Peng.
As of 1.40pm, MUST is trading flat at US$0.74 with a forward dividend yield of 7.52%.
