Manulife US REIT - UOB Kay Hian 2021-05-17: On The Lookout To Capture Growth

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - On The Lookout To Capture Growth

Manulife US REIT’s portfolio saw slight positive rental reversion in 1Q21. A sizeable 270,000sf of leases were executed, mainly done with renewals, although the company’s portfolio occupancy dipped slightly.
Manulife US REIT continues to highlight its plans to capture demand from high-growth trade sectors such as tech and healthcare tenants.
Maintain BUY with a target price of US$0.87.

Manulife US REIT (SGX:BTOU) saw a positive rental reversion of 2.1% in 1Q21 (2020: 4.7% excluding mark-to-market lease), mainly from finance and insurance, administrative, advertising and legal sectors. Leasing in 1Q21 was mainly done for renewals (about 94%), with minimal new leases. According the management, prospective tenants were active but cautious. The 270,000sf of leases executed was about 5.8% of its portfolio’s NLA. This has reduced lease expiries in 2021 to 4.3% of NLA (from 5.7%), and 2022 to 13.0% of NLA (from 18.1%).

Portfolio occupancy fell to 92% (2020: 93.4%) though this was still above US Class-A average occupancy of 82%. Manulife US REIT noted that existing vacancies remains a challenge, with larger spaces taking a longer time to fill.

Manulife US REIT recently obtained a US$250m sustainability-linked loan which incorporates interest-rate reductions linked to predetermined sustainability performance targets. Weighted average interest rate was lowered to 3.0% in Apr 21 (vs 3.18% in 2020) while weighted average debt to maturity increased to 3.4 years (vs 2.3 years in 2020).

Gearing levels were unchanged at 41.3% in 1Q21. The portfolio’s long WALE is also intact, with 49% of leases by NLA expiring in 2026 and beyond. The top 10 tenants accounted for 36% of the gross rental income in 1Q21 with rental collection in 1Q21 robust at 98%.

Manulife US REIT continues to highlight its plans to capture demand from high-growth trade sector such as tech and healthcare tenants. Current tenant exposure in such sectors accounts for 10% of Manulife US REIT’s portfolio, and the company intends to grow this segment of tenants to account for approximately 20% of tenant base. This could also take the form of JVs or M&As, through the acquisition of yield-accretive properties or portfolio.
Manulife US REIT prefers key locations with strong fundamentals such as cities with robust population growth and increasing rental rates. An example is the Sun Belt region which has seen a 1.6% growth in population size p.a., and has a lower cost of living compared to gateway cities.

Current physical occupancy in Manulife US REIT’s portfolio remains low, at only 5-25% as of end-Apr 21, affecting carpark income. Vaccination rollout has been swift in the US. According to the Centers for Disease Control & Prevention, the current proportion of population who have received at least one dose of vaccine in various key regions is as follows: California (52%), New Jersey (55%), and Georgia (37%).

Manulife US REIT’s Class-A assets still stand in good stead compared with the market’s occupancy rates. According to JLL, net effective rents for 1Q21 in CBD Class-A space have dipped 13% below pre-pandemic levels, though the decline appears to have slowed down.

Maintain BUY with a target price of US$0.87, based on DDM (required rate of return: 8.0% terminal growth: 1.0%).
Key risks: Slowdown in the US economy, affecting demand for office space.
See

Lucas Teng UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2021-05-17

SGX Stock Analyst Report BUY MAINTAIN BUY 0.870 SAME 0.870