- BUY, new TP of USD0.83 from USD0.86, 38% upside. Manulife US REIT’s 1Q business update shows that return-to-office trends across its key markets have been a bit slower than anticipated, and leasing momentum has been impacted by Omicron. More employees are starting to return to the office (since April) with a pick-up seen in leasing tours, but its outlook is slightly dampened by macroeconomic headwinds. Despite a slow start to 2022, its valuation remains undemanding at 0.9x P/BV with c.9% yields.
- Portfolio metrics stabilising. Portfolio occupancy rate dipped 0.6ppts QoQ to 91.7%, mainly from downsizing/non-renewal of two tenants on c.20k sqf at Peachtree, Atlanta and Figueroa, Los Angeles. Leasing velocity fell in 1Q to c.68k sqf (-66% QoQ), which management attributed to Omicron and the pushback on offices reopening. On a positive note, about 54% of leases were new (FY21:28%) with demand coming from the accounting, real estate, and financial sectors. Physical occupancy at its assets has been gradually improving since April to 34%, the highest since the start of the pandemic. Office leasing tours have picked up (+30%) too, indicating that the US office sector could finally be emerging from pandemic-led restrictions. The limited office supply and need for quality office space post- COVID-19 has led to overall rents holding firm and rising slightly, with rent reversion at +3.9% (1Q) – expected to remain positive for the rest of 2022.
- No material impact from interest rate, utility increase. MUST has hedged 86.5% of its debt – every 1% increase in rates should have a marginal 1.4% impact on DPU. It has secured commitments for USD207m of loans expiring this year and, with expiring loans’ interest costs being relatively high at 3.4% pa, we do not see any significant increase to current borrowing costs. As for utility charges, these are all recovered from tenants on a usage basis. As such, the impact – if any – would be marginal on the vacant spaces in the buildings.
- Tripp Gantt takes over as new CEO with the retirement of Jill Smith who was CEO since listing (2016). Gantt, an American, has >23 years of experience in real estate including 16 years overseeing real estate companies on behalf of Washington State Investment Board, a US pension fund with USD25bn in real estate. He highlighted his key focus would be on improving MUST’s operational performance – boosting occupancy, income and valuation of assets. We believe his vast experience could bring in more M&A opportunities for the REIT in the medium term.
- We trim FY22-24F DPU by 2-3% by fine-tuning occupancy assumptions. On the ESG front, MUST has been a flagbearer among US office REITs and has the highest ESG score of 3.3 out of 4.0 (based on our proprietary in-house methodology), among REITs we cover. As this is three notches above the country median, we apply a 6% premium to its intrinsic value.
Source: RHB Research - 10 May 2022
