FY21 Results Analysis: At an inflection point
- MUST recorded FY21 DPU of 5.33 UScts (-5.5% y-o-y), in line with estimates; 2H21 saw signs of recovery though delayed by new COVID variants
- Key positives: i) portfolio occupancy improved led by Michelson’s vacancy partly filled and new acquisitions, ii) US Treasury renewed at strong positive reversions but shorter period, iii) rental reversions remain positive; FY22 expiring leases are 2.1% below market rents
- Key negatives: i) continue to see larger occupancy decline in some buildings
- Maintain BUY; TP of US$0.88. Despite setback from new COVID variants, MUST is poised (with the recent acquisitions) to ride on the office recovery post Omicron.
| Summary of Results | 2H2021 | 2H2020 | % y-o-y | 1H2021 | % h-o-h | FY2021 | FY2020 | % y-o-y |
| Revenue | 94.3 | 95.7 | -1.4% | 90.8 | 3.9% | 185.1 | 194.3 | -4.7% |
| NPI | 53.5 | 53.7 | -0.3% | 56.1 | -4.6% | 109.5 | 115.8 | -5.4% |
| DI | 42.6 | 41.0 | 4.0% | 43.0 | -0.9% | 85.6 | 89.0 | -3.8% |
| DPU | 2.63 | 2.59 | 1.5% | 2.70 | -2.6% | 5.33 | 5.64 | -5.5% |
| Key Operational Highlights | 4Q2021 | 4Q2020 | % y-o-y | 3Q2021 | % q-o-q |
| Portfolio occupancies | 92.3% | 93.4% | -1.1 ppt | 90.9% | 1.4 ppt |
| Rental reversions (cumulative) | -0.8% | 0.1% | -0.9 ppt | 1.3% | -2.1 ppt |
| WALE (years) | 5.1 | 5.3 | (0.2) | 5.1 | – |
| Gearing | 42.8% | 41.0% | 1.8 ppt | 42.0% | 0.8 ppt |
| Average cost of debt* | 2.82% | 3.18% | -0.4 ppt | 3.00% | -0.2 ppt |
| DSCR | 3.40 | 3.50 | (0.1) | 3.30 | 0.1 |
| Leases expiring in FY2022 | 8.1% | 17.8% | -9.7 ppt | 11.8% | -3.7 ppt |
| Leases expiring in FY2023 | 13.1% | 8.7% | 4.4 ppt | 14.2% | -1.1 ppt |
DPU decline mainly due to lower occupancy and portfolio carpark income; NAV decline further to US$0.68
- 2H21 DPU +1.5% y-o-y to 2.63 UScts largely due to lower provisions (US$0.3m vs US$3.6m in 2H20) and higher car park income (+36.4%) partially offset by higher vacancies.
- FY21 DPU -5.5% y-o-y to 5.33 UScts, in line with our estimates, mainly due to lower NPI (-5.4% y-o-y) from lower occupancy, lower portfolio carpark income (-11.2% y-o-y) and higher rental abatements of 1.4% vs 0.5%, partially offset by net reversal of provision for expected credit losses (ECL) of US$1.7m.
- 2H21 revenue and NPI fell 1.4% y-o-y and 0.3% y-o-y respectively mainly due to lower occupancies at Michelson (-16% y-o-y), Phipps (-5% y-o-y), Centerpointe (-6% y-o-y) and Capitol (-12% y-o-y), partially offset by higher carpark income and reversal of provision.
- Gearing was relatively stable at 42.8% vs 42% in 3Q21. Average cost of debt lowered to 2.82% vs 3% in 3Q21 and 3.18% in 4Q20
- NAV declined marginally to US$0.67 vs US$0.68 in 2Q21 and US$0.70 in 4Q20
- Portfolio saw slight improvement in valuation (+0.4% h-o-h) on mostly flattish cap rates with some movements ranging from -25bps to +25bps on some assets. Assets which saw larger decline were Michelson (-1.2%, cap rates +25bps), Plaza (-6.2%, flat) and Exchange (-1.8%, flat) while Centrepointe valuation improved by 3.7% with cap rates compression of 25bps.
Key Highlights
(+) Portfolio occupancy improved marginally q-o-q with Michelson’s vacancy partly filled and newly acquired assets; US Treasury renewed its lease by c.3.6years
- Portfolio occupancy improved by 1.4ppt q-o-q to 92.3% vs 90.9% in 3Q21 partially contributed by Michelson’s vacancy partly filled and newly acquired assets .
- Larger occupancy decline within the portfolio were seen in Figueroa (-4.4ppt h-o-h) that brought occupancy to below 90% at 88.6% and Phipps to 94.5% from 100% in 2Q21 (tenant returned a floor in 3Q21).
- We note that the US Treasury has renewed its lease by c.3.6 years to expire in Aug 2025 (previous 10-year lease expired in Jan2022)
- As per guided in the previous quarter, Michelson’s occupancy has improved to 87.2% with the bulk of new leases signed in 3Q21 were mainly for Michelson.
(+) FY22 expiring leases are 2.1% below market rents; US Treasury recorded +9.5% reversions
- Rental reversions fell q-o-q to -0.8%. Excluding Michelson backfilling leases, reversions were +3.3% possibly largely contributed by the renewal of US Treasury lease which achieved +9.5% reversions with no or very little TIs and rent-free period.
- 2H21 leases signed see improvements with new leases improved (28.1% of leases signed in 2H21 mainly for Michelson vs 7.9% in 1H21), longer lease executed (5.1 years vs 2.8 years in 1H21) and net effective rents have improved by 3.4% h-o-h.
- 2022 expiries are -2.1% below market with no expiries from Michelson
- Management expects FY22 rental reversions to be positive low single digit.
(+) Continue to see strong recovery momentum in the US Office market; signing more new leases in 2H21 (largely to backfill Michelson’s vacancy)
- Management continue to see strong recovery momentum in the US Office market despite the Omicron variant with better leasing momentum, higher net effective rents and easing TIs and free rent.
- Management continue to see strong leasing demand from tech / healthcare tenants and continue to work towards higher exposure to these tenants in the growth market (FY21 at 12.8% vs Target of c.20%)
- In 4Q21, MUST signed c164k sqft (vs c.185k sqft in 3Q21, c.80k sqft in 2Q21 and c.270k sqft in 1Q21) with the bulk of the renewals from the renewal of US Treasury lease.
- Subleasing is now at minimal, according to JLL US market office overview.
(-) Higher rental abatement in FY21 due to conversion of ECL previously provided; management expects rental abatement will remain minimal and likely to taper off in FY22
- Rental abatement was higher in FY21 y-o-y mainly due to the conversion of c.US$1.5m ECL previously provided in 4Q20 related to 1 retail tenant was converted into rental abatement.
- Management do not expect significant rental abatement in FY22 but should likely taper off as more employees return to office. Rental abatement will largely be for retail tenants and will likely remain below 2% of GRI.
(+) MUST is poised to gain from flight to quality trends seen towards newer and green buildings with 90% of its portfolio comprises of green buildings.
- Management noticed flight to quality trends toward newer and green buildings
- MUST is on one of the first among its peers to very focused in driving sustainability with net zero target by 2050
- MUST recorded +7.8% above US peers benchmark on GRESB Environment / Building Score
- 90% of MUST’s portfolio comprises of green buildings and target to achieve 100% green certified portfolio by 2030
MUST currently trades at 0.96x P/NAV and c.9% FY22F yield factored in slightly stronger recovery in FY22 previously. Despite US office recovery has been setback by both the Delta and Omicron variant, we are hopeful that this is likely an inflection period as US economy emerges into a recovery mode.