MANULIFE US REIT (SGX:BTOU)
Manulife US REIT - US Office Recovery Underway Amid Challenging Outlook
- For 1Q22, Manulife US REIT (SGX:BTOU)’s overall portfolio occupancy dipped slightly to 91.7%. New leases formed 54% of total leases signed while about 68,000sf of leases were executed at +3.9% positive rental reversion.
- Manulife US REIT continues to highlight its plans to capture demand from high-growth trade sectors such as tech and healthcare tenants. Maintain BUY with the same target price of US$0.80.
Manulife US REIT (MUST) provided operating metrics for 1Q22 with no financials given.
- Lower overall portfolio occupancy. Overall portfolio occupancy in 1Q22 fell to 91.7% (4Q21: 92.3%) as tenants downsized or gave up space in Peachtree and Exchange. However, Michelson’s overall occupancy increased to 89.2% in 1Q22 (4Q21: 87.2%), with passing rents above market rates.
- Gradually improving physical occupancy. Across Manulife US REIT’s portfolio, 1Q22 overall physical building occupancy has been on an uptrend and is expected to continue, from 29% in 4Q21 to 34%/32% in Apr/May 22 respectively. As work-from-home becomes a secular trend, Manulife US REIT could face lower physical occupancy compared with pre-COVID-19 levels. With carpark income historically contributing roughly 6-7% of total annual revenue, improving physical occupancy would help underpin a recovery in carpark income.
- Steady WALE and strong leasing sentiment. Improving tenant sentiment was seen as new leases formed 54.0% of leases signed in 1Q22. Manulife US REIT executed about 68,000sf of leases in 1Q22, with strong positive rental reversion of +3.9%. Weighted average lease expiry (WALE) remained steady at 5.0 years (5.1 years in 4Q21) as 49.4% of leases by NLA are expiring in 2027 and beyond. Total expiring leases for 2022 by NLA softened to 6.2% from 8.0% in 4Q21.
- Two of Manulife US REIT’s top ten tenants by gross rental income (GRI) have lease expiries in 2023, with one tenant intending to vacate by Dec 23. However, these leases have rents 9.9% below market rates, indicating possible positive rental reversion. Also, management has already started searching for possible tenants to take up the space after 2023, mitigating any loss in rental income.
- Gearing remains steady. Gearing levels remained unchanged at 42.8% in 1Q22. With debt headroom of about US$360m (50% gearing), we reckon Manulife US REIT may add on acquisitions from emerging industries such as tech and healthcare as their next focus.
Cautious economic outlook.
- Although there is a challenging global macroeconomic outlook, US unemployment rate continued its decline to 3.6% in 1Q22, near pre-pandemic levels and reaching decade lows. This has spilled over into the US office sector as 1Q22 leasing volumes were up 5.4% q-o-q while base (+3.0%) and net effective rents (+2.6%) trended upwards q-o-q.
- However, as potential tenants become unclear on space requirements due to global uncertainties, 1Q22 subleasing and tenant incentives/free rents increased slightly by 2.6% q-o-q and 2.5% q-o-q respectively.
Maintain BUY on Manulife US REIT
- Maintain BUY with a target price of US$0.80, based on DDM (required rate of return: 8.0% terminal growth: 1.0%).
- Key risks: Slowdown in the US economy, affecting demand for office space.
- Catalysts: Better-than-expected rental reversion, return to offices in the US.
- See
Llelleythan Tan
UOB Kay Hian Research
|
Jonathan KOH CFA
UOB Kay Hian
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https://research.uobkayhian.com/
2022-05-10
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