Manulife US REIT - UOB Kay Hian 2020-08-04: 2Q20 Riding Through COVID-19


Manulife US REIT - 2Q20 Riding Through COVID-19

  • Manulife US REIT’s ability to ride through the pandemic hinges on its long WALE (5.7 years), occupancy (96.2%), and diversified tenant base. Management continues to downplay any negative impact from COVID-19 and WFH trends on office demand-supply dynamics, while seeing a potentially faster US recovery (vs GFC).
  • Maintain BUY with unchanged US$0.85 target price.

Manulife US REIT's 2Q20 Results

  • Manulife US REIT (SGX:BTOU) reported 1H20 DPU of 3.05 S cents (+0.3% y-o-y), while distributable income grew 20%yoy. 1H20 gross revenue and NPI were both up 18.3% and 18.8%% y-o-y, largely due to contributions from Centerpointe and Capitol acquired in FY19, partially offset by lower rental income from Michelson and lower portfolio carpark income.
  • 1H20 DPU forms 51% of our full-year forecasts.


Positive rental reversions (+7.9%) in 1H20 may continue.

  • Signing leases (~217,300sf NLA/4.7% of portfolio NLA) came mainly from the finance and insurance, legal, real estate and tech tenants, and were executed with 6.9 years WALE and rental escalation of 2.4% p.a., comprising renewals (50%), new (42%) and expansion leases (8%). Some 96% of leases by GRI have rental escalations, while remaining 4% (82% of which are government leases) do not.
  • Manulife US REIT’s passing rents are competitive (passing rent 5-10% below market mostly) and provide a buffer for positive reversion.

Portfolio occupancy grew marginally

  • Portfolio occupancy grew marginally to 96.2% (+0.4ppt h-o-h), mainly attributable to increases at Peachtree (+3.3ppt h-o-h). Manulife US REIT’s Best-in-Class properties have also exceeded respective market occupancies (except for Sacramento).
  • Full occupancies were attained in Buckhead Atlanta (Phipps) and Washington DC (Penn). Overall, MUST’s portfolio of 96.2% compares favourably to the 89.9% US average.

Gearing increased but still healthy at 39.1% (+1.4ppt h-o-h), due to softening valuations.

  • In 1H20, investment properties recorded a net fair loss of US$77.3m, due to the appraiser factoring in lower rental growth assumptions as a result of the COVID-19 pandemic, adjusted for capex and other costs relating to investment properties.
  • Overall, cap rates still remained relatively stable at 5.6% (-0.1ppt h-o-h), while property valuations declined 2.9% h-o-h. Management expects the valuation decline to reverse, once COVID- 19 pandemic subsides.
  • Manulife US REIT also has a well-spread debt maturity profile with no debts due in 2020, after its US$100m maiden Green loan re-financing at 1.85% in Jul 20. At end-Jul 20, Manulife US REIT also increase its weighted average debt maturity to 2.8 years (+22%).

Income stability underpinned by a diversified tenant base, long WALE (5.7 years), and minimal near-term expiries.

  • Manulife US REIT has only minimal expiries in 2020 (3.4%) and 2021 (5.7%) by NLA. The US office market is also different compared with Singapore, where office leases are usually longer at 5/10/15 years (vs Singapore norm of 3 years) with no break clauses, no early terminations, although US office tenants can sub-lease spaces. Anecdotally, management has not seen any discernible increase in sub-leasing by its tenants, suggesting their high quality.
  • Manulife US REIT’s inorganic growth to nine properties has diversified its tenant base to 17 trade sectors. Among its largest trade sectors by gross rental income (GRI), Legal trade (22%) is unlikely to see consolidation as majority of its tenants have right-sized, followed by Finance and Insurance (19.9%) which may see an increase in its take-up due to stricter social distancing, and finally, the Retail Trade (13.5%) that mainly comprises tenants in children’s apparel, which is an essential sector.

Limited supply upcoming, which are not in direct competition.

  • Only three of Manulife US REIT’s submarkets have upcoming supply, beginning with Buckhead Atlanta (340,000sf/2021) that is unlikely to have much impact on Phipps as it is 100% leased with 7.6 year WALE. Midtown Atlanta (679,000 sf/2021) has been 40% pre-leased by Google and has an asking rent that is 80% higher. The supply in Washington, D.C. (482,000sf/2022) is not comparable to Penn (Class A) as they are Trophy grade with asking rents that are 20% higher.

Post-COVID-19: The future of US office.

  • Management alleged that unlike Singapore, Work-From-Home (WFH) has been introduced to the US since the 1990s; 54% of US workers are entitled to WFH benefits as at 31 Mar 20. Hence, only an incremental 2% of US workers prefer to WFH full-time due to the COVID-19 pandemic.
  • A physical office continues to be essential for the company’s branding and culture, which drives employee connectivity, engages/attracts talent, and increases productivity. Manulife US REIT’s top trade sectors (IT, Insurance, Healthcare, Legal, and Finance) were early adopters of WFH. The pandemic also means a delay in workers returning to dense gateway CBD offices, in contrast to Manulife US REIT’s urban suburban offices.
  • Supply is likely to be kept in check, due to limited bank loans for developments and pre-leasing requisite for new construction starts. The pandemic means incremental space required for social distancing, while the new normal WFH/WFO combination still requires designated workspaces and does not reduce office demand.

Outlook: A potentially faster US recovery (vs GFC).

  • All nine of Manulife US REIT’s offices are currently 10-20% physically occupied as not all workers have returned to work from office due to a rising number of COVID-19 cases. Despite rent collection appearing to come down (ie Apr/May/Jun at 99%/97%/93%), management explained that tenants are only taking more time to pay.
  • Management sees a swift recovery compared to GFC, as banks are better equipped to maintain market liquidity, have less levered commercial real estate, less oversupply of inventory, and ~90% of US office leases have a lease balance over two years that can weather short-term impacts.


Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-04
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