• BUY, new TP of USD0.78 from USD0.83, 30% upside with c.9% FY22F yield. Manulife US REIT’s 2Q22 and 1H22 results came in slightly below our forecasts. Return-to-office activities involving its gateway portfolio have been much slower than expected and weak compared to that of secondary growth markets. This uncertainty has resulted in slow leasing momentum and downsizing by existing tenants, although MUST’s long lease profile and limited upcoming lease expiries mitigates some of this impact. Overall, we believe that the current uncertainties are largely priced in.

• 1H DPU dropped by 3.3% YoY due to lower occupancy rates and the absence of credit provision reversals. This was partially offset by acquisition contributions, lower rebates and higher carpark income. In 1H, MUST gave rental rebates amounting to c.USD200k (vs USD2m last year) – this is expected to taper off. Carpark income rose 75% YoY to USD6.3m. In July, it refinanced c.USD187m of loans at the trust level, leading to a c.11bps increase in overall interest costs to 2.97% pa. 86% of loans are currently hedged, with every 100bps hike in rates resulting in a c.1.5% DPU impact.

• Portfolio occupancy down 1.7ppt QoQ to 90% mainly on the occupancy rate decline at Exchange, Jersey City (85.4%, -10.2ppt QoQ) as a tenant moved out and consolidated at a nearby building. TCW, its second largest tenant (c.3.8% of income), will also be moving to another asset at the end of its lease in Dec 2023. This is done mainly to avoid major renovations at its current space, which it had been occupying since the 1990s. Another top 10 tenant, Quinn, will be downsizing space at Figueroa by 71k sqf from end- August, but renewed the lease for the remaining 64k sqf for another 5.4 years from Sep 2023, at a rental reversion of +2.5%. These moves indicate that large tenants – especially financial and law firms – have been re- evaluating their space usage and adopting more hybrid policies post- pandemic. That said, there are no other top 10 tenants with leases expiring before mid-2025. Overall rental reversion was flattish in 2Q.

• MUST is evaluating more flex options to cater to evolving trends in the US office market, and is in talks with various operators including JLL on the hotelisation of office space and maximising occupancy. This will likely be rolled out slowly across its assets depending on evolving market conditions.

• Divestments are still on the cards but management noted that the funding environment for big-ticket office buildings has dried up, due to the current uncertainty. MUST’s net gearing is on the high side, at 42.4%, which leaves little room for acquisitions in the near term.

• We cut FY22-24F DPU by 5-6% after adjusting for early lease terminations and lower occupancy rates. MUST has a high ESG score of 3.3 out of 4.0 (based on our proprietary in-house methodology – so we apply a 6% premium to our intrinsic value to derive our TP.

Source: RHB Research - 5 Aug 2022