Still work in progress
- 3Q23 portfolio occupancy dipped, but rent reversion was a robust +24.2%.
- To address its financial covenant breach and longer-term liquidity, MUST assembled a Sponsor package and identified non-core assets for sale.
- Reiterate Add, with a TP of US$0.25.
3Q23 update highlights
3Q23 portfolio occupancy slipped qoq to 84.7% (from 85.1% at end-2Q23). Manulife US REIT (MUST) leased/renewed 193k sq ft of space in 3Q23 (9M: 636k sq ft), including early renewal of its fourth largest tenant, Kilpatrick Townsend at Peachtree. Renewal demand made up 90% of the leases signed in 3Q. Tenants were mainly from the legal, finance & insurance, healthcare, accounting, construction and information sectors. Overall, MUST posted a +24.2% rent reversion in 3Q23 (+10% in 9M23). MUST has a balance of 5.6%/13.4% of leases expiring in 4Q23F/FY24F. According to property consultant Jones Lang Lasalle, although leasing volumes in MUST’s submarkets continue to be slow, lease terms are lengthening. Net effective rents appear to be stabilising, and tenant incentives are moderating. That said, sub-leasing activities continue to inch up qoq as tenants sublease their under-utilised spaces.
Assembled Sponsor package, identified non-core assets for sale
As at end-3Q23, MUST’s aggregate leverage stood at 56%, based on Monetary Authority of Singapore (MAS) guidelines, while its interest coverage (ICR) slipped to 2.4x. With its interest rate hedges progressively rolling off, the proportion of fixed rate loans dipped to 69.2% in 3Q23 (from 80.2% in 2Q23), while interest cost rose qoq to 4.38%. With US office values still under pressure for 2023F, we believe gearing should remain elevated in the near term. In terms of its ongoing discussion with lenders, MUST indicated it remains focused on negotiations with lenders, formulating long-term liquidity plans, pursuing a mandate to divest assets to reduce its debts and for capex, and undertaking a strategic review of the REIT. Management updated that it has assembled a Sponsor package, and execution of this package will depend on lenders’ approval. In addition, it has identified non-core assets for sale based on future return potential and capex requirements We believe that until there is more visibility on MUST’s negotiations for a waiver of its financial covenants, its share price could likely remain under pressure.
Retain Add rating
We keep FY23-25F DPUs unchanged and maintain our DDM-based TP at US$0.25. While the uncertainty of outcome of its negotiations with its lenders remains a near-term overhang on its share price, we believe its current valuation of 0.13x FY23F P/BV has factored in much of its operational and financial challenges. Hence, we maintain our Add call. Potential re-rating catalysts: quick conclusion to its negotiations with its lenders and a swift recovery of the US office transactions market, which would provide more financial and earnings certainty. Key downside risks: slower-than-expected backfilling of vacated spaces impacting its near-term income visibility, and a protracted slowdown in the US economy, which could dampen appetite for its office space.
