Manulife US REIT - CGS-CIMB Research 2021-08-12: Staying On Course

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Staying On Course

Manulife US REIT's 1H21 DPU of US$0.027 is below expectations, at 45.8% of our FY21 forecast.
Portfolio occupancy slipped in 1H21 but signs of increased leasing activities.
Reiterate ADD on Manulife US REIT with a lower DDM-based target price of US$0.92.

Manulife US REIT (SGX:BTOU) posted y-o-y declines of 7.9% in gross revenue to S$90.8m and 9.8% in net property income to US$56.1m, due to lower occupancy at Michelson, Centerpointe and Capitol, and reduced carpark income. There were also rental abatement/deferments of 2.4%/0.3% of gross rental income, partly offset by reversal of credit loss provision made earlier.
Manulife US REIT's 1H21 distribution income of US$43m (-10.4% y-o-y) translates to DPU of US$0.027. The trust also revalued its portfolio value down by 1.1% during this period.

Portfolio occupancy dipped h-o-h to 91.7% as at end-1H21. Manulife US REIT signed 305k sq ft of leases in 1H21 and achieved +1.3% rental reversion (+3.3% reversion excluding a shorter lease contract), broadly in line with its earlier guidance. Taking into account a further 0.6% of rental income that was re-contracted in Jul, Manulife US REIT has a balance of 2.1%/13.2% of leases due to expire in 2H21F/FY22F.
Manulife US REIT indicated that it had further renewed ~54% of the remaining 2H21F expiries since Jun 21. Manulife US REIT indicated that the US office leasing market appears to have stabilised amid the US economy’s reopening, as evidenced by market leasing volume rebounding ~29% q-o-q and longer lease contracts being signed. Asking rents have also risen marginally q-o-q, with tenant incentives and rent-free terms starting to moderate.
Nonetheless, with portfolio occupancy still below its pre-COVID level, we believe Manulife US REIT would continue to adopt a more flexible leasing strategy including accepting shorter lease terms and providing attractive concessions for longer leases.

In Apr, Manulife US REIT completed the refinancing its debt maturing in FY21F, and achieved a lower all-in interest cost of 2.99%. Gearing, after partial debt repayment of US$15m, stands at 41.6%.
We anticipate the impact of the interest cost savings to be felt in the coming quarters. In terms of inorganic growth prospects, management indicated it would likely continue to look for opportunities, including exploring JVs and M&As as well as capital recycling for growth.

We lower our FY21-23F DPU estimates for Manulife US REIT by 4.5-7.29% to take into account the frictional vacancy periods and higher level of incentives and rent-free periods. Accordingly, our DDM-based target price is lowered to US$0.92.
Our ADD call remains. At a projected FY21F dividend yield of 7.2%, we believe much of the slower near-term growth has been priced in.
We continue to like Manulife US REIT for its resilient portfolio, with 95.5% of its leases by gross rental income having built-in rental escalations.
See
Potential re-rating catalysts: better-than-expected rental reversions and faster-than-expected ramp up in portfolio occupancy.
Key downside risk: protracted slowdown in the US economy which could dampen appetite for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-12

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