Manulife US REIT - RHB Invest 2022-05-10: A Slow Return To The Office; Keep BUY

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - A Slow Return To The Office; Keep BUY

Manulife US REIT (SGX:BTOU)’s 1Q business update shows that return-to-office trends across its key markets have been a bit slower than anticipated, and leasing momentum has been impacted by Omicron. More employees are starting to return to the office (since April) with a pick-up seen in leasing tours, but its outlook is slightly dampened by macroeconomic headwinds.

Despite a slow start to 2022, Manulife US REIT's valuation remains undemanding at 0.9x P/BV with ~9% yields.
BUY, new target price of US$0.83 for Manulife US REIT from US$0.86, 38% upside.

Manulife US REIT's portfolio occupancy rate dipped 0.6ppts q-o-q to 91.7%, mainly from downsizing/non-renewal of two tenants on ~20k sqf at Peachtree, Atlanta and Figueroa, Los Angeles. Leasing velocity fell in 1Q to ~68k sqf (-66% q-o-q), which management attributed to Omicron and the pushback on offices reopening.
On a positive note, about 54% of leases were new (FY21:28%) with demand coming from the accounting, real estate, and financial sectors. Physical occupancy at its assets has been gradually improving since April to 34%, the highest since the start of the pandemic.
Office leasing tours have picked up (+30%) too, indicating that the US office sector could finally be emerging from pandemic-led restrictions. The limited office supply and need for quality office space post- COVID-19 has led to overall rents holding firm and rising slightly, with rent reversion at +3.9% (1Q) – expected to remain positive for the rest of 2022.

Manulife US REIT has hedged 86.5% of its debt – every 1% increase in rates should have a marginal 1.4% impact on DPU. It has secured commitments for US$207m of loans expiring this year and, with expiring loans’ interest costs being relatively high at 3.4% pa, we do not see any significant increase to current borrowing costs.
As for utility charges, these are all recovered from tenants on a usage basis. As such, the impact – if any – would be marginal on the vacant spaces in the buildings.

Tripp Gantt takes over as new CEO with the retirement of Jill Smith who was CEO since listing (2016). Gantt, an American, has > 23 years of experience in real estate including 16 years overseeing real estate companies on behalf of Washington State Investment Board, a US pension fund with US$25bn in real estate.
Tripp Gantt highlighted his key focus would be on improving Manulife US REIT’s operational performance – boosting occupancy, income and valuation of assets. We believe his vast experience could bring in more M&A opportunities for the REIT in the medium term.

We trim FY22-24F DPU forecast for Manulife US REIT by 2-3% by fine-tuning occupancy assumptions.
On the ESG front, Manulife US REIT has been a flagbearer among US office REITs and has the highest ESG score of 3.3 out of 4.0 (based on our proprietary in-house methodology), among REITs we cover. As this is three notches above the country median, we apply a 6% premium to its intrinsic value.
See

Singapore Research RHB Securities Research | Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2022-05-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.83 DOWN 0.86