US Office Recovery Underway Amid Challenging Outlook
For 1Q22, MUST’s overall portfolio occupancy dipped slightly to 91.7%. New leases
formed 54% of total leases signed while about 68,000sf of leases were executed at
+3.9% positive rental reversion. MUST continues to highlight its plans to capture
demand from high-growth trade sectors such as tech and healthcare tenants. Maintain
BUY with the same target price of US$0.80.
WHAT’S NEW
• 1Q22 update. Manulife US REIT (MUST) provided operating metrics for 1Q22 with no
financials given.
• Lower overall portfolio occupancy. Overall portfolio occupancy in 1Q22 fell to 91.7%
(4Q21: 92.3%) as tenants downsized or gave up space in Peachtree and Exchange.
However, Michelson’s overall occupancy increased to 89.2% in 1Q22 (4Q21: 87.2%), with
passing rents above market rates.
• Gradually improving physical occupancy. Across MUST’s portfolio, 1Q22 overall physical
building occupancy has been on an uptrend and is expected to continue, from 29% in 4Q21
to 34%/32% in Apr/May 22 respectively. As work-from-home becomes a secular trend,
MUST could face lower physical occupancy compared with pre-COVID-19 levels. With
carpark income historically contributing roughly 6-7% of total annual revenue, improving
physical occupancy would help underpin a recovery in carpark income.
• Steady WALE and strong leasing sentiment. Improving tenant sentiment was seen as
new leases formed 54.0% of leases signed in 1Q22. MUST executed about 68,000sf of
leases in 1Q22, with strong positive rental reversion of +3.9%. Weighted average lease
expiry (WALE) remained steady at 5.0 years (5.1 years in 4Q21) as 49.4% of leases by NLA
are expiring in 2027 and beyond. Total expiring leases for 2022 by NLA softened to 6.2%
from 8.0% in 4Q21. Two of MUST’s top ten tenants by gross rental income (GRI) have lease
expiries in 2023, with one tenant intending to vacate by Dec 23. However, these leases have
rents 9.9% below market rates, indicating possible positive rental reversion. Also,
management has already started searching for possible tenants to take up the space after
2023, mitigating any loss in rental income.
• Gearing remains steady. Gearing levels remained unchanged at 42.8% in 1Q22. With debt
headroom of about US$360m (50% gearing), we reckon MUST may add on acquisitions
from emerging industries such as tech and healthcare as their next focus.
STOCK IMPACT
• Cautious economic outlook. Although there is a challenging global macroeconomic
outlook, US unemployment rate continued its decline to 3.6% in 1Q22, near pre-pandemic
levels and reaching decade lows. This has spilled over into the US office sector as 1Q22
leasing volumes were up 5.4% qoq while base (+3.0%) and net effective rents (+2.6%)
trended upwards qoq. However, as potential tenants become unclear on space requirements
due to global uncertainties, 1Q22 subleasing and tenant incentives/free rents increased
slightly by 2.6% qoq and 2.5% qoq respectively.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with a target price of US$0.80, based on DDM (required rate of return:
8.0% terminal growth: 1.0%).
• Key risks: Slowdown in the US economy, affecting demand for office space.
SHARE PRICE CATALYST
• Better-than-expected rental reversion.
• Return to offices in the US