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


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.

Portfolio metrics stabilising.

  • 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.

No material impact from interest rate, utility increase.

  • 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

  • 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.

Trim FY22-24F DPU forecast by 2-3%

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