• Manulife US REIT's 2021 DPU was down 5.5% y-o-y and slightly below our expectations, dragged by lower carpark income and occupancy along with higher rental abatements. The US office market is showing a strong recovery momentum as overall leasing volumes and rents have trended upwards.
• For 2H21, Manulife US REIT saw a recovery in new leases signed and improving rents. Exposure to the fast growing tech and healthcare sectors increased to 12.8% of GRI.

Manulife US REIT's 2021 Results

• Underwhelming performance, dragged down by lower occupancy rates. Manulife US REIT (SGX:BTOU)’s 2021 DPU was slightly below expectations, falling 5.5% y-o-y and forming 95.6% of our full-year forecasts. The drop in DPU was due to higher rental abatements, lower carpark income (-11.2% y-o-y) and lower rental income caused by higher vacancies.
• Softer occupancy rates in 2021. Manulife US REIT's overall portfolio occupancy softened 1.1ppt in 2021 to 92.3%, caused by non-renewals and downsizing of several tenants. However, 2H21 portfolio occupancy grew 1.4ppt h-o-h as the US office market showed signs of a recovery. Manulife US REIT executed 645,000sf of leases (12% of net lettable area, +230% y-o-y) in 2021, with roughly 192,000sf of leases signed in 4Q21 (+34% q-o-q, +240% y-o-y). Expiring leases by gross rental income (GRI) for 2022 dropped to 8.1% from 11.8% in 3Q21.
• Expect potential positive rental reversion. Although Manulife US REIT experienced a -0.8% rental reversion in 2021, excluding Michelson, Manulife US REIT would have had a positive 3.3% rental reversion. This was largely due to Michelson’s long-lease expiring rents being above market rents due to compounded annual rent escalations. We may expect positive single-digit rental reversion of roughly 2.1% as 2022 expiries are below market rents, backed by improving fundamentals. Lastly, 2H21 net effective rents were up 3.4% h-o-h as rental-free period and tenant incentives started to taper off.
• Gearing remains steady. Manulife US REIT's gearing levels increased slightly to 42.8% (3Q21: 42.0%) due to the recent three acquisitions. With debt headroom of about US$320m (50% gearing), we opine that Manulife US REIT may add on acquisitions due to favourable macroeconomic tailwinds, specifically aiming assets with cap rates of 6.5-7.5% and exposure to tech and healthcare. Manulife US REIT’s exposure to these fast growing sectors increased from 9.5% to 12.8% of GRI.

Strong Recovery Momentum in the US Office Market

• The US economy is facing a strong recovery as:
  1. more of its population gets fully vaccinated, and
  2. there is strong government support/spending.
• This has spilled rates for Manulife US REIT.

Manulife US REIT - Earnings Forecast Revision & Recommendaton

• Decrease our 2022-23 DPU forecasts slightly, while adding our 2024 DPU forecast. We decrease our dividend play with its generous 2022-23 dividend yields of 8.9% and 9.2% respectively.
• Catalysts:
  • Positive newsflow on office leasing activity.
  • Return to office in the US.

Source: UOB Kay Hian Research - 15 Mar 2022