Manulife US REIT - Phillip Securities 2022-02-16: Leasing Recovery Overpowered By Occupancy Loss


Manulife US REIT - Leasing Recovery Overpowered By Occupancy Loss

  • Manulife US REIT (SGX:BTOU)'s FY21 DPU of US$0.0533 (-5.5 % y-o-y) was a miss, forming 93% of our forecast, due to lower-than-forecasted portfolio occupancy.
  • Occupancy slid 1.1ppts on non-renewals and downsizing, but US office market is showing signs of recovery. Leasing momentum doubled y-o-y, while net effective rents improved 3.4% y-o-y.
  • Upgrade Manulife US REIT from ACCUMULATE to BUY; DDM-based target price (COE 9.1%) raised from US$0.84 to US$0.86.
  • FY21 occupancy came in lower than we anticipated. As such, we lower FY22e- 24e DPUs forecast for Manulife US REIT by 2.1-6.3% to factor in the gradual recovery in occupancy from the current, lower-than-forecasted portfolio occupancy.

The Positive

Leasing momentum doubled y-o-y with net effective rents improving 3.4%.

  • Manulife US REIT signed 654k sq ft, or 12% of NLA, in FY21, 2.3x the NLA executed in FY20. Traditional office tenants such as finance and insurance and government agencies accounted for 47% and 20% of leases signed.
  • Reversions came in at -0.8% (FY20: +0.1%), weighed down by leases signed at Michelson. Michelson’s expiring rents were above market rents due to the 2-3% annual escalation on long leases, leading to negative reversions when the leases were renewed at market rates. Excluding leases signed at Michelson, reversions would have been +3.3% (FY20: +4.7%).
  • More importantly, net effective rents grew 3.4% y-o-y, as the rent-free period and tenant incentives eased. While improving, net effective rents are still 10-15% below pre-pandemic levels.
  • Leases signed in FY21 were for an average term of 4.0 years, slightly shorter than the 6.4 years for leases signed in FY20.

The Negative

Occupancy hurt by non-renewals and downsizing.

  • Manulife US REIT's portfolio occupancy slid 1.1ppts y-o-y to 92.3%, 3.5ppts below FY19 levels. This compares with the average occupancy of 88.2% for Class A offices. Lower occupancy was due to non-renewals and downsizing with notable occupancy losses at Figueroa (-4.4 ppts), Penn (-5.4 ppts), Phipps (-5.5 ppts) and Capitol (-5.0 ppts).


  • FY21 physical occupancy at Manulife US REIT’s properties ranged from 25-30%. Manulife US REIT provided rental abatement of US$2.4mil, or 1.4% of GRI, for F&B and retail tenants in FY21 (FY20: 0.5% of GRI). More pronounced return-to-office is expected to lift carpark income and lower rental abatement burden.
  • The US office market continues to show signs of recovery. This can be seen from
    1. improving net effective rents;
    2. lower TIs;
    3. longer lease tenures signed;
    4. decline in subleasing; and
    5. improving rental growth outlook for MUST’s cities.
  • About 8.1% of Manulife US REIT's GRI is up for renewal. FY22 renewals could yield positive reversions, given that passing rents are 2.1% below market rents.
  • Future acquisition is still focused on markets with high representation of tech, healthcare and life science tenants. Manulife US REIT is eyeing assets with cap rates ranging 6.5% to 7.5% in sunbelt and magnet cities -- Seattle, Salt Lake City, Austin, Boston, and Raleigh.
  • Following the acquisition of three properties in Phoenix and Portland in Dec21, Manulife US REIT’s exposure to tech and healthcare tenants increased from 9.5% to 12.8% of GRI. It hopes to increase its exposure to new economy tenants to 20% of GRI.

Upgrade from Accumulate to BUY, DDM target price raised from US$0.84 to US$0.86

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2022-02-16
SGX Stock Analyst Report BUY UPGRADE ACCUMULATE 0.86 UP 0.840