More signs of recovery
? 2H/FY21 DPU of 2.63/5.33 UScts is in line at 48.8%/98.9% of our FY21 forecast
? Portfolio occupancy rose hoh in 2H21; it expects positive rental reversion in FY22F
? Reiterate Add rating with a lower DDM-based TP of US$0.89
2H21 results highlights
MUST posted yoy declines of 1.4% in gross revenue to US$94.3m and 0.3% in net property income to US$53.5m for 2H21, due to lower rental income from weaker occupancy, partly offset by higher carpark income and lower provision for expected credit losses. Distribution income of US$42.6m translates to DPU of 2.63 UScts (+1.5% yoy). FY21 DPU of 5.33 UScts was 5.5% lower yoy. The trust revalued its portfolio value up 0.4% during this period.
Higher portfolio take-up, expects positive rental reversion in FY22F.
Portfolio occupancy was 92.3% at end-2H21, lower vs. end-2H20’s 93.4% but higher than end-1H21’s 91.7%. MUST signed 654k sq ft of leases in FY21 (349k sq ft in 2H21) and achieved -0.8% rental reversion (+3.3% reversion excluding Michelson, broadly in line with its earlier guidance). It has a balance of 8.1%/13.1% of leases due to expire in FY22F/ FY23F. MUST indicated that the US office leasing market appears to have stabilised. About 28% of leases signed in 2H came from new or expansion demand. Meanwhile, longer leases were signed, averaging 5.1 years, and net effective rents were also 3.4% higher than in 1H21. For the broader market, MUST indicated that sub-leasing activities have also decreased qoq. MUST guided that it expects to achieve low single-digit positive rental reversion for FY22F as its 2022F expiries are 2.1% below current market rents.
Continues to focus expansion in growth cities or tenants
In terms of capital management, MUST achieved a lower all-in interest cost of 2.82% at end-FY21. Gearing stood at 42.8%. With 86.5% of its debt in fixed rate loans, MUST indicated that for every 1% increase in funding cost, its DPU will decrease 0.075 UScts (or 1.4% of FY21 DPU). In terms of inorganic growth prospects, management indicated it would likely continue to increase its exposure in growth cities or tenants in growth sectors and would look for opportunities, including exploring JVs and M&As as well as capital recycling for growth.
Reiterate Add rating
We lower our FY21-23F DPU estimates by 0.16-0.4% post results as we believe the new leases it signed in the latter part of FY21F are likely to start to contribute to earnings from 2H22F. Accordingly, our DDM-based TP declines to US$0.89. Our Add call remains. At a projected FY22F dividend yield of 7.7%, much of the slower near-term growth has been priced in, in our view. We continue to like MUST for its resilient portfolio, with 96% of its leases by gross rental income having built-in rental escalations. Potential re-rating catalysts: better-than-expected rental reversions and faster-than-expected ramp up in portfolio occupancy. Key downside risk: protracted slowdown in the US economy which could dampen appetite for office space.