Manulife US REIT (MUST SP) – Improving US office fundamentals
• 2H21 DPU rose 1.5% YoY
• FY21 rental reversion at -0.8%
• Stronger recovery momentum in 2H21
2H21 DPU missed expectations – Manulife US REIT’s (MUST) 2H21 gross revenue and NPI fell 1.4% and 0.3% YoY to USD94.3m and USD53.5m, respectively, pulled down by lower rental income and higher non-cash amortisation of tenant lease incentives, but partially offset by higher portfolio carpark income and additional revenue contribution from the newly acquired properties in Dec 2021. As such, 2H21 DPU rose 1.5% YoY to 2.63 US cents while full year DPU was down 5.5% YoY to 5.33 US cents, slightly below our expectations on larger unit base and lower than expected rental income.
Low lease expiry profile in FY22 – As at 31 Dec 2021, portfolio occupancy was at 92.3% (+1.4 ppt QoQ) and rental collection was strong at 99.8%. From 1H to 2H21, the proportion of new/expansion leases
increased 2.6x to 28.2% of leases executed while WALE improved to 5.1 years (from 2.8 years in 1H21). Rental reversion came in at -0.8%. Excluding Michelson, rental reversion would have been at +3.3%. Looking into FY22, 8.1% and 8.0% of leases by GRI and NLA are due for expiry respectively. With the expiring rents in 2022 at 2.1% below market rents and no leases expiring in Michelson in 2022, management expects low single digit positive rental reversion in 2022.
US office sector saw stronger recovery momentum in 4Q21 – According to JLL, office leasing activity rose 9.2% QoQ (at 71.3% of pre-Covid-19 levels) in 4Q21. Net absorption was positive for the first time
since the onset of Covid-19 while asking rents remained stable and sublease space further stabilised in 4Q21. MUST saw a similar recovery momentum in 2H21 with net effective rents improving 3.4% HoH and longer leases signed. We trim our terminal growth rate assumption by 25bps to 1% as MUST’s high gearing ratio of 42.8% (with 86.5% of borrowings at fixed rate) amid a rising interest rate environment could potentially constrain its longer-term growth, in our view. After adjustments, our fair value estimate decreases from USD0.83 to USD0.80.
ESG Updates
Manulife US REIT’s (MUST) ESG rating was upgraded in Dec 2020 mainly due to stronger corporate governance, led by improved executive pay disclosures and adoption of clawback policies. In addition, MUST demonstrates strong green building programmes as indicated by its robust efforts to further increase the proportion of green-certified buildings in its portfolio relative to peers (89% vs. the industry average of 25%). However, MUST shows lagging efforts to attract and retain talent relative to peers according to research. BUY. (Chu Peng)