1H22 DPU of 2.61 UScts was slightly below at 45.3% of our FY22F forecast.
Focus on boosting near-term occupancy while enhancing resilience of portfolio by providing more workspace solutions to attract premium tenants. Reiterate an Add rating with a lower DDM-based TP of US$0.78.
1H22 results highlights
MUST reported 10.6%/2.8% growth in 1H22 gross revenue/NPI to US$100.4m/ US$57.6m, due largely to contributions from new acquisitions in FY21 and higher carpark income, partly offset by lower income from existing properties. 1H DPU declined 3.3% yoy to 2.61 UScts due to an enlarged unit base from the Dec 2021 private placement. Portfolio occupancy slipped 1.6% pt qoq to 90%, dragged by lower take-up at Exchange, Penn and 400 Capitol. Physical occupancy at MUST’s buildings average 28% in Jul 22.
Potential near-term drag from upcoming expiries
MUST signed 192k sqft of leases in 1H22 (2Q: 124k sq ft), of which 28.7% are new leases. New demand came from legal, finance and insurance and real estate sectors. It achieved a positive rental reversion of 1% for 1H (2Q: 0.1%) and maintains its guidance of low-to mid-single digit reversions for FY22F. MUST has a balance of 4.8%/10.1% of leases due to expire in 2HFY22F/FY23F. Management indicated that its second largest tenant by NLA, TCW Group, has decided to vacate its space when its lease expires in Dec 2023. TCW occupies 189k sqft of space (26.4% of property NLA) at Figueroa. Meanwhile, Quinn Emanuel plans to give up 71k sqft of its space at Figueroa from end-Aug 2022 but extended the lease for its remaining 64k sqft of space for 5.4 years from Sep 2023. Management indicated that it is in negotiations with prospective tenants. That said, we believe downtime would be needed to backfill the vacated spaces. According to management, TCW’s expiring rents are c.10% below current market levels while some other opportunities include availability of signage rights and potential modern move-in ready space that could appeal to large tenants. The potential income vacuum as well as uncertainty over demand outlook as tenants adopt a hybrid work structure and rising tenant incentives are likely to drag on MUST’s near-term prospects.
Two-pronged approach towards capital and portfolio management
In terms of capital management, MUST’s weighted all-in cost of funds stands at 2.97% as at end-1H22. With 85.7% of its debt in fixed rate loans, MUST indicated that for every 1% increase in funding cost, its DPU will decrease 0.079 UScts. Gearing stands at 42.4% at end-1H. While its near-term focus is on improving leasing and portfolio occupancy, management will adopt a two-pronged approach in its capital and portfolio management strategy. It will remain nimble to leverage location and quality of its assets to attract choice tenants, build partnerships with flex operators to provide greater workspace solutions for existing and new tenants as well as shortlisting assets for hotelisation to attract tenants at premium rents.
Maintain Add rating
We lower our FY22-24F DPU estimates by 10.2-14.3% as we factor in downtime to backfill the vacated space as well as temper our forward rent growth expectation. Accordingly, our DDM-based TP is lowered to US$0.78. At a projected FY22F dividend yield of 8.6%, we believe much of the slower office sector outlook has been priced in. 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.