Manulife US REIT - OCBC Investment 2022-02-10: Improving US Office Fundamentals

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Improving US Office Fundamentals

Manulife US REIT (SGX:BTOU)’s 2H21 gross revenue and NPI fell 1.4% and 0.3% y-o-y to US$94.3m and US$53.5m, respectively, pulled down by lower rental income and higher non-cash amortisation of tenant lease incentives, but partially offset by higher portfolio carpark income and additional revenue contribution from the newly acquired properties in Dec 2021.
As such, Manulife US REIT's 2H21 DPU rose 1.5% y-o-y to US$0.0263 while full year DPU was down 5.5% y-o-y to US$0.0533, slightly below our expectations on larger unit base and lower than expected rental income.

As at 31 Dec 2021, Manulife US REIT's portfolio occupancy was at 92.3% (+1.4 ppt q-o-q) and rental collection was strong at 99.8%. From 1H to 2H21, the proportion of new/expansion leases increased 2.6x to 28.2% of leases executed while WALE improved to 5.1 years (from 2.8 years in 1H21).
Rental reversion came in at -0.8%. Excluding Michelson, rental reversion would have been at +3.3%.
Looking into FY22, 8.1% and 8.0% of leases by GRI and NLA are due for expiry respectively. With the expiring rents in 2022 at 2.1% below market rents and no leases expiring in Michelson in 2022, management expects low single digit positive rental reversion in 2022.

According to JLL, office leasing activity rose 9.2% q-o-q (at 71.3% of pre-COVID-19 levels) in 4Q21. Net absorption was positive for the first time since the onset of COVID-19 while asking rents remained stable and sublease space further stabilised in 4Q21. Manulife US REIT saw a similar recovery momentum in 2H21 with net effective rents improving 3.4% h-o-h and longer leases signed.
We trim our terminal growth rate assumption by 25bps to 1% as Manulife US REIT’s high gearing ratio of 42.8% (with 86.5% of borrowings at fixed rate) amid a rising interest rate environment could potentially constrain its longer-term growth, in our view.
After adjustments, our fair value estimate for Manulife US REIT decreases from US$0.83 to US$0.80.
See

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2022-02-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.80 DOWN 0.830