Manulife US REIT (MUST) may have had a weak quarter in 2QFY2022 ended June, but the impact dealt by falling US office occupancy are “largely priced in”, write RHB Group Research analyst Vijay Natarajan.
MUST reported distribution per unit (DPU) of 2.61 US cents (3.6 cents) for the 1HFY2022 ended June, down 3.3% y-o-y, as the unit base was enlarged after a private placement last December. That said, revenue, net property income (NPI) and distributable income were all up 10.6%, 2.8% and 6.9% y-o-y respectively.
“Manulife US REIT’s 2QFY2022 and 1HFY2022 results came in slightly below our forecasts,” writes Natarajan. “Return-to-office activities involving its gateway portfolio have been much slower than expected and weak compared to that of secondary growth markets. This uncertainty has resulted in slow leasing momentum and downsizing by existing tenants, although MUST’s long lease profile and limited upcoming lease expiries mitigates some of this impact. Overall, we believe that the current uncertainties are largely priced in.”
In an Aug 5 note, Natarajan is maintaining “buy” on MUST with a lower target price of 78 US cents from 83 cents previously. The new target price represents a 30% upside with 9% FY2022F yield.
MUST blamed lower DPU on falling occupancy rates and the absence of credit provision reversals. This was partially offset by acquisition contributions, lower rebates and higher carpark income.
Portfolio occupancy was down 1.7 percentage points q-o-q to 90%, mainly on the occupancy rate decline at Exchange as a tenant moved out and consolidated at a nearby building.
See also: MUST reports DPU of 2.61 US cents, sees office use in 'once-in-a generation upheaval'
TCW, its second largest tenant (representing 3.8% of income), will also be moving to another asset at the end of its lease in December 2023. “This is done mainly to avoid major renovations at its current space, which it had been occupying since the 1990s,” says management.
Another top 10 tenant, Quinn, will be downsizing its space at Figueroa by 71,000 sq ft from end-August, but renewed the lease for the remaining 64,000 sq ft for another 5.4 years from September 2023, at a rental reversion of +2.5%.
According to Natarajan, these moves indicate that large tenants, especially financial and law firms, have been re-evaluating their space usage and adopting more hybrid policies post-pandemic. “That said, there are no other top 10 tenants with leases expiring before mid-2025. Overall rental reversion was flattish in 2QFY2022.”
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Expect a better 2HFY2022
Meanwhile, Maybank Research analyst Chua Su Tye says recovery is underway, though headwinds are also rising.
In an Aug 4 note, Chua is recommending investors “buy” MUST, with a lower target price of 85 US cents from 88 US cents previously.
According to Chua, US office fundamentals are set to improve with rising physical occupancies and higher leasing volumes in 2HFY2022. “Demand is varied across MUST’s submarkets, with lease terms lengthened but on lower volumes; growth on its base rents tempered by rising concessions; and subleasing climbing with tenants’ space rationalisation.”
Strong asset management know-how is key in Chua’s view, and we see management prioritising asset enhancement initiatives (AEIs) and adding flex-space to support yields on its trophy assets, as demand eases with hybrid work arrangements.
Gearing was stable at 42.4%, compared to 42.8% as at end-March, says Chua. This implies a US$359 million debt headroom against a 50% limit. “MUST is leading peers on green financing initiatives, with green/sustainability-linked loans at 44.8% of its borrowings, set to rise to 67.0% post-refinancing.”
Chua adds: “While MUST is keen to push ahead on AUM growth, we see limited scope for near-term acquisition growth, given its weak share price and high leverage.”
As at 1.10pm, units in Manulife US REIT are trading 1 US cent lower, or 1.68% down, at 58.5 US cents.
