Manulife US REIT’s (MUST) portfolio occupancy slipped further to 88.1% as of Oct 18, extending a decline from 90.0% as at end-June and 91.7% as at end-March.
This was largely due to law firm Quinn Emanuel’s downsizing of some 71,000 sq ft at Figueroa in Downtown Los Angeles effective Aug 31, says the REIT at the release of its results for 3QFY20222 ended September.
That said, MUST highlights that this is above the US Class A office average of 80.5%, according to JLL’s US office outlook in 3Q2022.
Portfolio weighted average lease export (WALE) dipped slightly q-o-q to 4.9 years from 5.0 years. That said, MUST executed some 61,000 sq ft of leases in the quarter — 56.8% of them new leases — adding to a year-to-date total of 254,000 sq ft, or some 4.7% of portfolio net lettable area (NLA).
Year-to-date, MUST reports a 1.7% increase in rental reversion, and a 4.3% increase in 3QFY2022.
Meanwhile, MUST’s weighted average debt maturity stands at 3.1 years, and 81.1% of its debt are fixed rate loans. As at Sept 30, gearing stands at 42.5%, holding steady from 42.4% as at July 11. With some US$105 million in debt maturing in 2023, MUST says it will secure refinancing by FY2022.
See also: Manulife US REIT eyes 'hotelisation' to quell falling occupancy and DPU
MUST’s weighted average interest rate stands at 3.34% and every 1% increase in interest rate will impact distribution per unit (DPU) by 0.105 US cents, says MUST. The REIT had reported DPU of 2.61 US cents for 1HFY2022 ended June.
Mixed signals
Leasing volume is sluggish, says MUST, pointing to mixed signals in leasing among its submarkets.
See also: MUST reports DPU of 2.61 US cents, sees office use in 'once-in-a generation upheaval'
MUST notes a flight to quality that is during leasing activity in the US. “Relocations grew as a share of total leasing activity [with] renewals at historic lows. More than 95% of tenants who relocated moved to equal or better quality spaces. Despite downsizing, tenants are price agnostic, paying higher rents for modernised or productive spaces,” says MUST.
In turn, MUST is doubling down on its “hotelisation” strategy, introduced in 2QFY2022, an asset enhancement initiative.
Its Peachtree Class A office building in Atlanta will embark on hotelisation in 1H2023, while its Plaza building in New Jersey introduced a flexible space solution in 3Q2022.
Works at Peachtree, which will cost some US$18 million over two years, will include a grand entrance, lobby, conference centre, coffee bar and outdoor terrace. This will be in conjunction with securing and renewing an anchor tenant, and MUST expects an internal rate of return (IRR) of some 9%, as rent at hotelised assets are some 30% above Peachtree’s.
Meanwhile, MUST is partnering commercial real estate services company JLL to provide tenants with flexible workspace at Plaza.
In Phase 1, or 2Q2023, this will involve some 15,407 sq ft, or 3.3% of the property’s NLA. In Phase 2 (2H2023) and 3 (4Q2023/1H2024), this could expand to some 20,451 sq ft.
With an estimated cost of US$6.8 million, the potential rent premium is 30% to the market’s rate, says MUST.
See also: Manulife US REIT's 1QFY2022 occupancy above US class A average at 91.7%
Looking ahead, headwinds continue to impact the real estate sector, says MUST. The REIT’s managers want to reposition the REIT through hotelised buildings and flex office solutions.
They also want to recycle assets, with managing gearing as a top priority.
Finally, the managers plan to form a strategic working group to explore a potential business pivot, strategic partnerships, joint ventures and mergers and acquisitions.
Units in Manulife US REIT closed 1 US cent lower, or 2.74% down, at 35.5 US cents on Nov 1. The REIT is trading 32 US cents lower year-to-date, or 47.01% down.
