MANULIFE US REIT (SGX:BTOU)
Manulife US REIT - Leasing, Lead The Way
- Manulife US REIT (SGX:BTOU)'s 1H21 DPU of US$0.027 (-11.5% y-o-y) in line, at 47.5% of our FY21e estimate.
- 6.5% of NLA signed with 2.7% more expected in 3Q21. Headline reversions positive at 1.3%, though increase in tenant incentives and rent-free periods led to 10-15% declines in net effective rents.
- Stabilising of US office market and pick-up in leasing demand positive. Expect return-to-office in 3Q/4Q21 to lift carpark income and reduce rental-relief burden on Manulife US REIT.
- Downgrade Manulife US REIT from Buy to ACCUMULATE on the back of limited near-term catalysts. FY21e DPU cut by 4.8% after taking in rental relief and slightly lower occupancies. No change to our DDM-based target price (COE 9.1%). FY21e/22e DPU yields 7.5%/8.02%.
Manulife US REIT's 1H21 - The Positives
Leasing momentum.
- Manulife US REIT signed 0.8% of NLA in 2Q21, bringing NLA signed in 1H21 to 6.5% or 305,000 sq ft. Including leases signed after the quarter, FY21 and FY22 lease expiries declined from 5.7% to 2.3% and 18.1% to 13.1%. Leases were signed by tenants in the real-estate, insurance, tech, logistics and accounting sectors. Renewals, expansion and new leases accounted for 92.1%, 4.7% and 3.3% respectively. Leasing improved q-o-q, with physical tours doubling and more tenants willing to sign longer 5- and 7-year leases. About 127,000sq ft or 2.7% of NLA is under advanced negotiations and could be signed in 3Q21.
Rental collections remained high at 99.0%.
- About 2.4% and 0.3% of rental income was given as rental abatement and deferrals to retail tenants in 1H21 to help them tide over reduced foot traffic.
Manulife US REIT's 1H21 - The Negatives
Positive reversions but still a tenants’ market.
- Reversions for 2Q21 and 1H21 were -3.7% and +1.3% respectively. The former was signed at Michelson, the only over-rented asset in Manulife US REIT’s portfolio. Low occupancy during the pandemic has resulted in a tenants’ market. Rent-free periods and tenant incentives increased by 20-30% for renewals and doubled for new leases signed. As such, Manulife US REIT’s effective net rents are 10-15% below pre-pandemic levels.
Portfolio occupancy declined 0.3ppt / 4.8ppts q-o-q / y-o-y to 91.7%, due to non-renewals and downsizing, mostly reflecting corporate relocations and consolidation.
- Occupancy at Michelson fell 9.7ppts y-o-y to 80.4% after the downsizing of LA Fitness and non-renewal by a legal tenant. Capitol’s occupancy fell from 91.4% to 85.4% after the non-renewal of a legal tenant who relocated to a suburban office. IDI Logistics’ departure from Peachtree was the main cause of a 9.7ppt y-o-y occupancy decline at this property to 90.4%. The only COVID-19 related non-renewal was at Centrepointe. The tenant decided to move to a purely work-from-home model, causing occupancy to fall from 98.7% to 91.6%. Still, portfolio occupancy of 91.7% punched above market occupancy of 87.8%.
Gearing up 2.5ppts y-o-y to 41.6% on declining valuations.
- Portfolio valuation has fallen 5.9%/1.1% since FY19/20. The largest valuation declines were for Centrepointe, Penn and Figueroa, down 11.5%, 7.6% and 7.3% from Dec 2019 levels due to the valuer’s assumptions of higher leasing cost expectations, tenant incentives, rent-free periods and higher current vacancies.
Manulife US REIT - Outlook
US office market stabilising
- Leasing volume increased by 28.7% q-o-q to 73% of 1Q21 levels. Average lease terms signed have increased q-o-q from 7.1 years to 7.4 years. Tenant incentives and rent-free periods have slowed after increasing 21.1% and 41.3% since 1Q20. Net effective rents for Class A assets increased by 5.2% q-o-q to 85.5% of 1Q20 levels. The pace of subleasing was down 80% y-o-y to 4.5% of existing stock. Twelve-month rental forecasts by CoStar Group were less negative for Manulife US REIT’s submarkets, ranging from -2.4% to 0%. This compares with Mar 2020’s outlook of -5.8% to -1.7%.
Favourable supply outlook for MUST’s submarkets
- Only three out of nine of Manulife US REIT’s submarkets have incoming supply in 2021 and 2022. In Midtown Atlanta, 679,200 sq ft, representing 3.4% of existing stock, has already come online this year and is 100% pre-leased to Google and a legal tenant. About 469,000 sq ft, or 1.5% of existing stock, will come online in 2022 in Washington D.C. However, this new supply is in the Trophy class and not comparable to Penn which is a Class A asset.
- Another 340,000 sq ft representing 2.0% of existing office supply will come online in 2022 in Buckhead Atlanta. Only 28% of this has been pre-leased and will compete with Manulife US REIT’s asset, Phipps.
Return-to-office to lift performance
- Physical occupancy at Manulife US REIT’s portfolio was 11% and 15% in 1Q21 and 2Q21. According to internal surveys by MUST in June 2021, physical occupancy is expected to reach 60% and 70% by 3Q21 and 4Q21 respectively, although the Delta variant remains a wild horse. Higher physical occupancy will help to lift carpark income and improve retail trading, in our view. As such, rent relief and credit loss provisions could ease in 2H21.
Shifting focus to New Economy sectors and secondary markets
- According to CBRE, tenants in the tech, healthcare and life science sectors accounted for 31% of leasing demand in 2020. Research by JLL in April 2021 confirmed these sectors are among the top-paying tenant industries. However, these New Economy industries only account for 10% of MUST’s tenants, which limits its ability to increase rents.
- Manulife US REIT’s future acquisitions are likely to focus on secondary markets where these industries are frequently located. These include Seattle, Salt Lake City, Austin, Boston and Raleigh where cap rates range from 6.5% to 7.5%. Manulife US REIT aims to increase its exposure to New Economy tenants to 20%. It is open to divesting, M&As and JVs to reposition its portfolio.
Downgrade Manulife US REIT from BUY to ACCUMULATE, unchanged DDM target price of US$0.84
- We lower our Manulife US REIT's FY21e DPU forecast by 4.8% after taking in rental relief and slightly lower occupancy. No change to our DDM-based target price. FY21e/22e DPU yields are 7.5%/8.0%. Downgrade Manulife US REIT to ACCUMULATE in view of limited near-term catalysts.
- See
- Prefer Prime US REIT (SGX:OXMU) in the sector for greater tenant exposure to STEM/TAMI sectors. See report: Prime US REIT - Phillp Securities 2021-08-05: Bottoming Out Expected At Year-End.
Natalie Ong
Phillip Securities Research
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https://www.stocksbnb.com/
2021-08-18
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