Manulife US REIT - Maybank Research 2022-08-04: Yield Cushion; Expect A Better 2H22 At Undemanding ~9% Yield

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MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Yield Cushion; Expect A Better 2H22 At Undemanding ~9% Yield

• Manulife US REIT (SGX:BTOU)’s 1H22 DPU fell 3.3% y-o-y/0.8% h-o-h, as contributions from its acquisitions were offset by lower occupancy and rental income. We expect improvement in 2H22 and better rental reversion; management’s FY22 guidance of a positive low to mid-single-digit is unchanged.
• We see tailwinds from recovering US office fundamentals, but cut DPUs by 2-3% on lower occupancies, while our DDM-based target price for Manulife US REIT (COE: 8.2%, LTG: 2.0%) falls to US$0.85 (from US$0.88).
• Manulife US REIT's DPU visibility remains high, cushioned by a 5.0-year WALE, low FY22-23E lease expiries and quality tenancies. Valuations remain undemanding at ~9% yield, and we stay at BUY.

Lower occupancy, -0.1% rental reversion

• Manulife US REIT's portfolio occupancy fell to 90.0% in 2Q22 (from 91.7% in 1Q22), with higher vacancies at Exchange, Penn, and Capitol.
• Leasing activity jumped 82% q-o-q to ~124k sf, with expiring leases in FY22 reduced to 4.8% of NLA (from 6.4% in 1Q22).
• Rental reversion was lower at -0.1% in 2Q22 (vs +3.9% in 1Q22 and -0.8% in FY21), with a lower 28.7% contribution from new leases (vs 54% in 1Q22).
• We see rents rising for its Figueroa asset, with backfilling of spaces owed to
  1. TCW (at 3.8% of gross rental income) given that its expiring rents are at 9% below market, and
  2. Quinn Emanuel, just renewed at +2.5% rental reversion.

Recovery underway, with headwinds rising

• US office fundamentals are set to improve with rising physical occupancies and higher leasing volumes in 2H22. Demand is varied across Manulife US REIT’s sub-markets, with:
  1. lease terms lengthened but on lower volumes;
  2. growth on its base rents tempered by rising concessions; and
  3. sub-leasing climbing with tenants’ space rationalisation.
• Strong asset management know-how is key in our view, and we see management prioritising AEIs (eg. at Michelson) and adding flex-space, to support yields on its trophy assets, as demand eases with hybrid work arrangements.

DPUs cushioned from rising rates

• Manulife US REIT's gearing was stable at 42.4% (vs 42.8% as at end-Mar 2022), implying a US$359m debt headroom (at 50% limit).
• Manulife US REIT is leading peers on green financing initiatives, with green/sustainability-linked loans at 44.8% of its borrowings, set to rise to 67.0% post-refinancing. With 85.7% in fixed-rate debt, a 50bps increase in interest rates could lower DPU by < 1%.
• See
  • Manulife US REIT's Share Price,
  • Manulife US REIT's Target Price,
  • Manulife US REIT's Analyst Reports,
  • Manulife US REIT's Dividend History,
  • Manulife US REIT's Announcements,
  • Manulife US REIT's Latest News.
• While Manulife US REIT is keen to push ahead on AUM growth, we see limited scope for near-term acquisition growth, given its weak share price, and high leverage.

Chua Su Tye Maybank Research | https://www.maybank-ke.com.sg/ 2022-08-04

SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 DOWN 0.95