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


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

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