Manulife US REIT - OCBC Investment 2022-08-05: Changing Office Trend

MANULIFE US REIT (SGX:BTOU)

Manulife US REIT - Changing Office Trend

Manulife US REIT (SGX:BTOU)’s 1H22 gross revenue and NPI grew 10.6% and 2.8% y-o-y to US$100.4m and US$57.6m, respectively, driven by additional contributions from acquisitions, lower renal abatements of US$200k (vs US$2m in 1H21), and higher carpark income. However, the growth was partially offset by lower rental income from existing properties due to lower occupancy rates and the absence of credit loss reversal.
Manulife US REIT's 1H22 DPU dropped 3.3% y-o-y to US$0.0261 due to an enlarged unit base from private placement, representing 48% of our initial expectations, in-line.

Physical occupancy rate at Manulife US REIT’s properties remained subdued at 28% as at 11 Jul 2022, as compared to 25.3% in 1Q22. As at 30 Jun 2022, portfolio occupancy was at 90.0% (-1.7 ppt q-o-q) due to non-renewals of three large tenants.
Manulife US REIT is in active discussions with the prospects to backfill the space. TCW Group and Quinn Emanuel, two of Manulife US REIT’s top 10 tenants had informed Manulife US REIT of their non-renewal/downsizing decisions.
- TCW accounts for 3.8% of Manulife US REIT’s gross rental income (GRI) indicated that they will vacate the space when their lease expires in Dec 2023 to avoid major renovation.
- Quinn Emanuel (2.9% of GRI) will downsize by 71k square feet (sq ft) effective 31 Aug 2022 but will renew the remaining 64k sq ft for 5.4 years from Sep 2023 with +2.5% rental reversion.

Manulife US REIT executed 192,000 sq ft of space in 1H22 with +1% rental reversion (1Q22: +3.9%; 2Q22: flat). While management continues to expect positive low to mid single digit of rental reversion for 2022, they noted that leasing activity and office demand have slowed down in the US. Tenant space needs remained unclear and most tenants are still downsizing.
Manulife US REIT expects the downsizing trend to continue as hybrid working models will stay and impact space needs. Management believes hotelisation of office could be the new normal ahead. Manulife US REIT is partnering with best-in-class flex operators, e.g. Flex by JLL, to explore opportunities to provide flexible office solutions and reinvent office space.

We believe Manulife US REIT will benefit from a flight to quality which remains the dominant trend of the US office market, and the impact of vacancy risks will be buffered by its low lease expiry profile (4.8% GRI in 2H22 and 10.1% of GRI in 2023).
We trim our DPU estimates for Manulife US REIT by 3-7% for FY22- 26 on lower occupancy estimates. After adjustments (risk-free rate: 3.5%; cost of equity: 8.5%), our fair value estimate for Manulife US REIT decreases from US$0.77 to US$0.69.
See

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2022-08-05

SGX Stock Analyst Report BUY MAINTAIN BUY 0.69 DOWN 0.770