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


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's DPU declines; NAV decreases to US$0.70

  • 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.

Key Highlights

Portfolio occupancy declined further from all assets except Capitol; key assets saw larger h-o-h declines

  • 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% on leases that were marked to market.

  • 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.

Healthy rental collections; minimal impact from rental relief and deferment; repayment has started for deferred rents.

  • 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 shrunk by 2% vs Jun 2020; key assets saw significant declines.

  • 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.

Looking to expand into other asset classes to acquire at least 20% high-growth tenants typically in business parks; open to JVs / M&A

  • 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.

Maintain BUY; lower target price to S$0.90.

Rachel TAN DBS Group Research | Derek TAN DBS Research | 2021-02-09
SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 DOWN 1.000