Manulife US REIT - DBS Research 2021-02-09: DPU & NAV Decline; Keenly Eyeing Business Parks

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - DPU & NAV Decline; Keenly Eyeing Business Parks

Manulife US REIT's 2H20 / FY20 DPU declines party due to lower NPI and provision for expected credit losses.
Key positives:
1. expresses interest to expand into other asset classes, such as business parks, to acquire at least 20% of high-growth tenants,
2. healthy rental collections and low rental relief.
Key negatives:
1. occupancies declined in all assets except Capitol,
2. rental reversions moderated to +0.1% due to mark-to-market leases.

Manulife US REIT (SGX:BTOU)'s 2H20 DPU fell 11% y-o-y to US$0.0259, partly due to lower NPI (-8% y-o-y) and provision for expected credit losses largely from retail trade and F&B tenants. We understand that the retail tenant has indicated that they will be paying back in full in FY21.
Manulife US REIT's FY20 DPU declined 5.4% y-o-y to US$0.0564, vs our estimates of US$0.0583.
2H20 revenue grew 1.2% y-o-y partially due to contributions from its latest acquisition of Capitol but offset by lower occupancies at Michelson and Peachtree.
Manulife US REIT's 2H20 NPI declined 8.2% y-o-y. All assets saw NPI y-o-y declines except Centrepoint (+2% y-o-y) and Capitol which was acquired in Oct 2019. Key assets (Figueroa, Michelson, Peachtree and Exchange) saw y-o-y declines ranging from 16-26%.
Gearing inched up to 41% vs 40% in 3Q20. Average cost of debt decreased to 3.18% vs 3.21% in 3Q20.
Manulife US REIT's NAV declined further to US$0.70 vs US$0.73 in 2Q20 and US$0.79 in 4Q19, due to a 2% drop in asset valuation vs the last valuation in Jun 2020.

Manulife US REIT's portfolio occupancy shrunk 0.9ppt q-o-q to 93.4% (vs 2Q20 at 96.2%).
All assets saw a decline in occupancy except Capitol which was relatively stable. Key assets saw larger h-o-h declines include Michelson (-5.7ppts), Peachtree (- 7.9ppts) and Centrepointe (-7ppts).
Management said that most of the vacancies were decisions that were made prior to COVID-19 and likely to be unrelated to the outbreak. However, the pandemic has slowed down leasing activities to backfill these vacancies, extending the period of transitional vacancies.
Subleasing remains low at 3.3% of NLA, -29% y-o-y (4.8% including tenant requests). The sublease markets in Manulife US REIT’s cities, ranging from 6.4%-21% of NLA, still fare lower compared to that of key gateway cities which range from 28-32%.

Rental reversions moderated to +0.1% vs 7.9% in 9M20, largely due to mark-to-market leases. Excluding leases that were marked to market, rental reversions recorded was +4.7%.
Management expects rental reversions to be moderate in FY21F.

Rental collections remained healthy at 94% in 4Q20 and 97% in FY20.
In FY20, there was minimal impact from rental relief and deferment at 0.5% of NPI and 0.6% of NLA (in 4Q20) respectively.

Portfolio valuation declined by 2% vs Jun 2020. All assets saw declines except Capitol.
Assets which saw more significant declines were from Figueroa (-2.8% h-o-h), Michelson (-4.8% h-o-h), Peachtree (-1.3% h-o-h), Exchange (-1.5% h-o-h) and Phipps (-1.4% h-o-h).
Portfolio cap rates remained stable, but we note some expansion in cap rates (largest expansion was Phipps at 6.5% from 5.4%) but this was offset by some compression in Figueroa, Michelson, Exchange and Capitol.

Management has indicated interest to expand its range of asset classes to acquire and capture at least 20% of high-growth tenants such as tech and healthcare tenants that are largely located in business parks and suburban offices.
Management believes that the suburban offices, which have been more resilient amid the ongoing decentralisation trend as they are more affordable and provide a better live-work-play environment for the workforce, could be a good addition to the portfolio.
Management also highlights that it is open to JVs / M&A as it looks for entry opportunities into good-quality assets.

We maintain our BUY rating for Manulife US REIT but lower our target price to US$0.90 from US$1.00. We reduce our Manulife US REITs FY21F and FY22F distributable income estimates by 3% to factor in lower occupancies in the portfolio as seen in the recent results.
See Manulife US REIT Share Price; Manulife US REIT Target Price; Manulife US REIT Analyst Reports; Manulife US REIT Dividend History; Manulife US REIT Announcements; Manulife US REIT Latest News.
Despite potential headwinds ahead, we believe Manulife US REIT will be back on track as we look forward to a return to normalcy as vaccines are widely distributed in the US and globally.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-09

SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 DOWN 1.000