MANULIFE US REIT (SGX:BTOU)
Manulife US REIT - 1H22 Slight Miss; Facing Challenging Outlook
- Manulife US REIT's 1H22 DPU was down 3.3% y-o-y and slightly below our expectations.
- Manulife US REIT had lower rental income from existing properties as overall occupancy fell 1.7ppt, supported by contributions from the new properties. Tenants in existing properties have started downsizing due to a secular shift to hybrid working models.
- Manulife US REIT guided for positive rental reversion as expiring rents from vacating tenants are below market rents.
- Maintain BUY recommendation on Manulife US REIT for its attractive yield of 9.0%. Target price: US$0.74.
Manulife US REIT's 1H22Results
- Lower DPU than expected. Manulife US REIT (SGX:BTOU)'s 1H22 DPU was slightly below expectations, falling 3.3% y-o-y and forming 46.5% of our full-year forecasts. The drop in DPU was largely due to an enlarged unit base from the private placement done in Dec 21.
- Lower occupancy rates. Overall portfolio occupancy softened 1.7ppt in 2Q22 to 90.0%, caused by non-renewals and secular downsizing in existing properties (Exchange, Penn and Capitol). Physical occupancy also softened slightly from 34.0%/32.0% in Apr/May 22 to 28.2% as of Jul 22.
- Robust leasing activity. Manulife US REIT executed about 192,000sf of leases in 1H22 (4.1% of NLA) with +1.0% rental reversion, with 124,000sf of leases in 2Q22 (+82.4% q-o-q, +254.3% y-o-y). Expiring leases by gross rental income (GRI) for 2022 dropped to 4.8% from 6.2% in 1Q22. Weighted average lease expiry (WALE) remained steady at 5.0 years with 52.6% of leases by NLA expiring in 2027 and beyond.
- Expect potential positive rental reversion. Manulife US REIT has guided for positive single-digit rental reversion moving forward. In Figueroa, management is in negotiation with prospective tenants to take over space vacated by TCW group (second largest tenant by NLA) in Dec 23, with expiring rents 9% below market rents. Manulife US REIT also renewed about 64,000sf of leases for Quinn Emanuel by around 5.4 years at +2.5% rent reversion from Sep 23 onwards, although about 71,000sf of leases would be given up from Sep 22 onwards as the tenant downsized.
- Gearing improved slightly. Manulife US REIT's gearing levels improved to 42.4% (1Q22: 42.8%) with 85.7% (1Q22: 86.5%) of borrowings being fixed-rate loans. Manulife US REIT refinanced all of its 2022 borrowings, improving weighted average debt maturity to 3.3 years (1Q22: 2.3 years). Every 1% increase in interest rate will impact DPU by US$ 0.079 cents.
Cautious economic outlook.
- Facing a challenging global macroeconomic outlook, US GDP declined 0.9% in 2Q22, the second straight quarter of decline. Job employment remains robust with 1.1m jobs added in 2Q22 but is expected to plateau while facing possible cutbacks moving forward. This has spilled over into the US office sector as according to Jones Lang LaSalle (JLL), 2Q22 leasing volumes have started moderating consecutively since 3Q21 while subleasing has risen from 4Q21 as firms reassess space needs/downsize. US base rents have gradually improved but dragged down by elevated tenant incentives.
- Hybrid working space the new norm. According to JLL, more companies in the US are shifting to a hybrid working model after the peak of COVID-19, whereby larger tenants are starting to downsize as they reassess their space needs. Facing this secular shit, offices with premium and flexible amenities while being located in great locations are more likely to attract tenants.
- To take advantage of this trend, Manulife US REIT has initiated several initiatives such as partnering with best-in-class flex operators and reinvesting its office space in existing properties. This allows Manulife US REIT’s properties to remain competitive and command premium rents.
- Manulife US REIT already has ongoing plans to introduce new amenities in Michelson.
Manulife US REIT - Earnings forecast revision and recommendation
- Decrease our 2022-24 DPU forecasts for Manulife US REIT by about 6%, after accounting for lower property income, higher interest expense and vacancy rates assumptions.
- Maintain BUY recommendation on Manulife US REIT with a lower target price of S$0.74 (previously: S$0.80), based on DDM assumptions of 9.0% required rate of return and terminal growth rate of 1.0%.
- In our view, Manulife US REIT remains an attractive dividend play with its generous 2022-24 dividend yields of 9.0%, 9.1% and 9.5% respectively. We opine that near-term challenges have already been priced in.
- See
- Catalysts:
- Positive newsflow on office leasing activity.
- Return to offices in the US.
Llelleythan Tan
UOB Kay Hian Research
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Jonathan KOH CFA
UOB Kay Hian
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https://research.uobkayhian.com/
2022-08-08
SGX Stock
Analyst Report
0.74
DOWN
0.795
