Manulife US REIT - OCBC Investment 2022-05-10: Downside Protection From Minimal Lease Expiry Profile

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Downside Protection From Minimal Lease Expiry Profile

Manulife US REIT (SGX:BTOU) reported its 1Q22 business update. Portfolio occupancy remained healthy but was down 0.6 ppt q-o-q to 91.7%, which remained above the US Class A average of 83%. The decline in occupancy rate was mainly due to downsizing/non-renewals of tenants, partially offset by an improvement in occupancy rate at Michelson.

Rental reversion improved to +3.9% vs -0.8% in FY21 with ~68,000 square feet executed in 1Q22, of which 54% came from new leases. 6.4% and 13.1% by gross rental income are due for expiry in 2022 and 2023, respectively.
We note that majority of the lease expiries are in the second half of 2022. With Manulife US REIT’s expiring rents in 2022 at 2.1% below market rents, management remains confident of achieving low single digit positive rental reversion in 2022.

Leasing volume in the US improved 13.8% q-o-q, with overall leasing volume at ~80% of pre-COVID levels. However, the return to office trend was slower in 1Q21, impacted by the emergence of the Omicron variant.
Manulife US REIT’s physical occupancy rate in 1Q22 fell by 3.7 ppt q-o-q to 25.3%, which was subsequently increased to 34% in Apr 2022.
Utilities cost made up 11% of Manulife US REIT's total operating cost in FY21 with the costs largely borne by tenants, except for the common area.
Given that 86.5% of debt is fixed, every 1% increase in interest rate will impact Manulife US REIT’s DPU by 0.075 U Scents (1.4%).
After adjustments and increasing our risk-free-rate to 2.95%, our fair value estimate for Manulife US REIT decreases marginally from S$0.80 to US$0.77.
See

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2022-05-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.77 DOWN 0.800