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Back to the office

• Upgrade to Outperform. US office properties are likely to see improving demand as more employees return, even if
it is on a part time basis. Improving fundamentals may finally lift investor confidence in the sector.
• MUST provides an excellent proxy to ride on the “return to office” theme in the US, while offering an attractive 7.4%
forward dividend yield.

Impact from Covid-19.

MUST declared a 1H2021 DPU of 2.70 US cents, a decline of 11.5% YoY. The decline comes amid a fall in portfolio occupancy from 96.2% as at end 2Q2020 to 91.7% as at end 2Q2021. Three out of its nine buildings – Michelson, Centrepoint and Capitol – led the decline in rental income.

Positive news.

Management has indicated that leasing activity is accelerating. Around 60% of MUST’s tenants have indicated their plans to return to the office from September, lifting revenue such as car park income. MUST has committed occupancy of 91.7% and only 2.9% of leases by NLA due over the remainder of 2021.

Easing of restrictions and increased vaccinations.

The US population has been increasingly vaccinated since January 2021, with 53% of the population vaccinated as of 2
September 2021. Stay-home orders have also been lifted in most states from April to May 2021 and restrictions have
been eased for certain indoor and outdoor recreational activities. We foresee a larger percentage of the population
returning to the workforce in 2021.

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US office transactions volume picking up.

After more than four quarters of a subdued office market in the US, leasing activity has started to pick up in 2Q2021. Gross leasing activity rose by 29% QoQ to 35mn sqft in 2Q2021, the first time it has gone above 30mn sqft since the start of Covid-19. Occupancy losses have slowed, and many tenants have now withdrawn space previously placed on the sublease market. According to JLL Research, the positive momentum will accelerate in the second half of 2021, albeit with wide variance based on asset quality and location.

Valuation & Action:

Upgrade to Outperform with a TP of US$0.82. MUST offers a decent yield of 7.4%, 7.5% and 7.6% for FY2021, FY2022 and FY2023 respectively. MUST’s gearing of 42.1% as of 30 June 2021 remains well below the regulatory 50% limit, while borrowing costs have declined to 2.99%, an improvement of around 20bps from Dec 2020.

Risks:

US tax changes would be the key risk, as it would have a negative impact on MUST’s DPU. Forex risks for local investors as revenues, unit price and dividends are in USD. Another potential risk from the impact of Covid-19 is the increased acceptance of work from home and higher-than expected working from home rate, which may lead to soft
office demand.