Resilient Portfolio, 7.9% Yield

• Manulife US REIT (SGX:BTOU)’s FY20 DPU fell 5.4% y-o-y largely due lower carpark revenue (at 7% of gross income and down 25% y-o-y) and provision for expected credit losses from its retail and F&B tenancies. Portfolio occupancy dipped to 93.4% due to non-renewals but remains at ~3-18% above market occupancies.
• We expect Manulife US REIT's FY21-22 DPUs to be cushioned by its low lease expiries, its strong assets and quality tenancies.
• Manulife US REIT's valuations are undemanding at 7.9% FY21 yield (as management maintains a 100% payout) vs 5.0-6.0% for its S-REIT peers, backed by high DPU visibility with stable income growth and low leasing risks, and upside as it returns to acquisition mode.
• Maintain BUY to our US$1.10 DDM-based target price (COE: 7.0%, LTG: 2.0%).

Slower Leasing Demand in FY20

• Manulife US REIT's portfolio occupancy fell q-o-q from 94.3% to 93.4% in 4Q20 and was lower in Michelson (which dipped to 84.4% from 90.1% in 1H20), Exchange (from 98.9% to 96.7%) and Centerpointe (98.7% to 91.7%).
• Rental reversion was +0.1% in FY20, from +7.9% in 1H20 as a lease at Centerpointe was marked-to-market in 4Q20; otherwise, a +4.7% reversion was achieved for FY20.
• 94% of its rents were collected in 4Q20, unchanged q-o-q, while 0.6% of deferment and 0.5% of abatement were provided to its F&B and retail tenants.
• US leasing demand fell ~47% y-o-y in 2020 to 125.6m sf, while lease terms were shortened, to 6.7 years on average, from 8.5 years pre-Covid, according to JLL.

Long WALE, Rental Recovery in FY21

• Manulife US REIT's WALE was lower at 5.3 years (5.5 years in 3Q20), with 47.3% of leases by NLA expiring in 2026 and beyond. WALE for its top ten tenants (public-listed companies, government bodies, corporate headquarters), contributing 35.8% of gross rental income, was higher at 5.6 years.
• The expiring leases in FY21-22 at 23.8% of NLA are attributed to Figueroa, Penn and Capitol. While new supply is projected in Atlanta and Washington DC, its well-placed, trophy assets are expected to cushion both occupancies and rents in FY21E, at +1.2% versus the +1.0% y-o-y for the US average.

Eyeing Business Parks for Growth

• Manulife US REIT's AUM fell 2.0% h-o-h due to higher vacancies and leasing costs, while cap rate was stable at 5.6%. Borrowings of USD216.5m for the Penn and Michelson properties are due to be refinanced in FY21 and expected to cut borrowing cost to 2.9% (from 3.18%) and extend its debt maturity to 3.3 years (from 2.3 years).
• Leverage rose to 41.0% (from 39.9%), with USD375m debt headroom (50% limit) to support potential deals.
• We believe Manulife US REIT's management is eyeing larger deals (USD500-600m) from third parties or JVs, as it pushes into business parks to add 20% of high-growth tenancies.

Source: Maybank Kim Eng Research - 8 Feb 2021