2H21 a miss, fundamentals sound
MUST’s results were a miss, with 2H21 DPU at +1.5% YoY and -2.6% HoH, on higher rental abatements, lower carpark income and higher vacancies. This was despite operational improvements, underpinned by strong leasing momentum and a positive rental reversion guidance into FY22. We see tailwinds from strengthening US fundamentals, but cut our DPUs by 5% on lower occupancies. DPU visibility remains high, and well-cushioned by its low FY22-23E lease expiries and quality tenancies. We see valuations undemanding at c.8.7% FY22E yield, with upside from acquisitions, as management deepens its ‘high-growth’ sector AUM. Maintain BUY with 5% lower DDM-based USD0.95 TP (COE: 7.8%, LTG: 2.0%).
Occupancy higher with new assets
Portfolio occupancy rose to 92.3% (from 90.9% in 3Q21), driven by its three new properties – Diablo Technology Park and Tanasbourne Commerce Center, two suburban office campuses; and Park Place, comprising two class-A office buildings, that were 93.4% occupied. Leasing activity was strong at c.200k sf, up 34% QoQ and 240% YoY, with expiring leases in FY22 falling to 8.0% of NLA (from 12.6% in 3Q21). Rental reversion was at -0.8% for FY21 (versus +1.3% for 9M21) and would have been stronger at +3.3%,
excluding Michelson. Management is guiding for similar low-to-mid single digit positive reversion into FY22.
Tailwinds from strengthening recovery
US market fundamentals are strengthening, with leasing volumes up c.14% QoQ and c.73% YoY, underpinned by longer average tenures of 7.8 years (from 7.7 years in 3Q21), while net effective rents rose c.7% QoQ and c.10% YoY, driven by a +2.1% QoQ improvement in base rents (versus +0.9% QoQ in 3Q21). Subleasing activity has continued to decline (was –1.6% QoQ in 3Q21), while tenant incentives (TIs) eased by -c.11% QoQ (from -2.4%), as the market’s overall rent-free period tightened to 8.2 months (from 8.9 months in 3Q21).
Gearing at c.43%, potential capital recycling
MUST’s new assets at c.USD202m, backed by ‘high-growth tenancies’, have pushed AUM up c.11% HoH to SGD2.2b, and gearing from 42.1% to 42.8%, while cap rates were stable at 5.50-7.50%. Management is keen to push ahead on acquisitions with an estimated SGD333m debt headroom (at 50% limit), but with gearing at an historical high, we see likely recycling opportunities as part of near-term portfolio rejuvenation priorities, before it makes another sizeable deal.