MANULIFE US REIT (SGX:BTOU)
Manulife US REIT 3Q21 Update - Proxy To US Office Recovery
- For 3Q21, Manulife US REIT (SGX:BTOU)’s overall portfolio occupancy dipped slightly to 90.9% even as leasing sentiment improved. New leases formed 32% of total leases signed while about 453,000sf of leases were executed at +1.3% positive rental reversion.
- 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 same target price of US$0.84.
Manulife US REIT (MUST) provided operating metrics for 3Q21 with no financials given.
- Lower portfolio occupancy. Overall portfolio occupancy fell to 90.9% (2Q21: 91.7%) due to tenants downsizing and non-renewals. However, Manulife US REIT’s occupancy rate is still above US Class-A’s average occupancy of 83%. Manulife US REIT also stated that portfolio occupancy improved to 91.6% post 3Q21 results. Michelson, (approximately 16% of portfolio AUM) saw portfolio occupancy rise to 87.2% (+6.8ppt q-o-q).
- Improving physical occupancy boosts carpark income. 3Q21 overall average physical occupancy improved to 20-30% from 15% in 2Q21 across Manulife US REIT’s portfolio, with the highest being at 60%. With carpark income historically contributing roughly 6-7% of total annual revenue, improving physical occupancy would help underpin a recovery in carpark income and total revenue from 2022 onwards.
- Stronger leasing sentiment. Improving tenant sentiment among corporates was seen across Manulife US REIT’s portfolio as new leases formed 32.3% of leases signed in 3Q21 as compared with 3.3% in 2Q21. As of Sep 21, about 453,000sf of leases have been executed year-to-date (9.7% of portfolio), with positive reversion of +1.3%.
- Steady WALE. Manulife US REIT’s portfolio with a long weighted average lease expiry (WALE) of 5.1 years remains intact as 52.0% of leases by NLA are expiring in 2026 and beyond. Expiring leases in 2021-22 by NLA have softened to 12.6% from 16.0% in 2Q21. Overall rental collections in 3Q21 were robust at 99.6%. The top 10 tenants, mostly from retail trade, finance and legal sectors, form 36.2% of the total gross rental income and had 100% rental collections.
- Gearing remains steady. Manulife US REIT's gearing levels remained unchanged at 42.0% (2Q21:42.1%) in 3Q21. With debt headroom of about US$300m (50% gearing), we reckon Manulife US REIT may add on acquisitions due to favourable macroeconomic tailwinds. Manulife US REIT has earmarked emerging industries such as tech and healthcare as their next focus.
Recovery of US office market underway.
- The US economy is facing a strong recovery as more of its population gets fully vaccinated and it is backed by strong government support/spending. According to the US Department of Labour, the country registered the lowest unemployment rate at 4.8% in Sep 21 since Mar 20 (4.4%). IMF has also forecast US’ 2021 GDP to grow by 6.0% despite a spike in Delta cases.
- Strong momentum. This has spilled over into the US office sector as 3Q21 leasing volumes were up 12.8% q-o-q while average tenures have increased from 7.4 to 7.7 years. Tenant incentives (-2.4% q-o-q) and rent-free periods have already started to soften and stabilise respectively while base (+0.9%) and net effective rents (+2.5%) have trended upwards q-o-q. Subleasing has declined for the first time since the emergence of COVID-19 at 1.6% q-o-q. Looking forward, with strong industry tailwinds, we reckon this would translate into stronger leasing environment and occupancy rates for Manulife US REIT.
- Moving into new exciting sectors. Manulife US REIT continues to highlight its plans to capture the demand from high-growth trade sectors such as tech and healthcare tenants. Current tenant exposure in such sectors accounts for 10% of Manulife US REIT’s portfolio and it plans to push it to 20%. 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, increasing rental rates and cap rates of 6.5-7.0%. 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 with gateway cities.
- Management has noted that Manulife US REIT has been actively searching for deals and has already assessed close to 40 deals year-to-date.
VALUATION & RECOMMENDATION
- Maintain BUY call on Manulife US REIT with a target price of US$0.84, 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
- Catalysts:
- Better-than-expected rental reversion.
- Return to offices in the US.
Llelleythan Tan
UOB Kay Hian Research
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Jonathan KOH CFA
UOB Kay Hian
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https://research.uobkayhian.com/
2021-11-10
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