• While 2020 has seen softer occupancy rates, we are optimistic of Manulife US REIT’s prospects given the speedy US vaccination programme as well as the US$1.9t stimulus package to boost the US economy. Employers continue to prefer a hybrid model of work from office and work from home, which bodes well for the resiliency in Manulife US REIT’s quality office portfolio.
• Maintain BUY with an attractive yield of 8.2%. Target price: US$0.87.

Updates From Manulife US REIT

• Manulife US REIT (SGX:BTOU)’s management recently shared about the group’s outlook and operations within the US office leasing market.

Sustainability of offices

• The CBD urban environment for Manulife US REIT’s offices remains relatively resilient given that most Class A tenants have been able to withstand the effects of COVID-19. Management noted that certain tenants have been beneficiaries of the pandemic. Manulife US REIT retains a high weighted average lease expiry (WALE) of 5.6 years, with the majority of its tenant base consisting of headquarters, listed companies and government entities.

Softer occupancy rates in 2020...

• Management noted that vacancies were due to known expiries largely unrelated to COVID-19, in addition to a slowdown in new leasing activities. To recap, 2020 results with 2H20 DPU of US$0.0259 (-11.3% y-o-y) was affected by lower net property income (NPI) (-8.2% y-o-y) and provision for expected credit loss. Occupancy rates declined (-2.8% h-o-h), while net asset value was US$0.70/share.
• A recent positive pertains to the expected credit loss. Manulife US REIT noted that the retail tenant, which accounted for half of the provisions, had already paid out its rental arrears in full.

…although recovery appears to be in place.

• Management stated that the company’s priority remains as tackling vacancy rates. Manulife US REIT intends to raise occupancy rates, which might mean that more flexible rental terms could be considered.
• Year-to-date, Manulife US REIT noted a small rental reversion growth, which appears promising for the recovery trend in the leasing market. Carpark income, which formed approximately 7% of gross revenue in 2019 (pre-COVID-19 basis) is also expected to recover from the return to workplaces. In addition, lease expiry in 2021 is relatively small at 5.8% of total portfolio.

Vaccination rates point towards optimism.

• Current physical occupancy accounts for only 15% of Manulife US REIT’s portfolio.
• Vaccination rollout has been swift in various regions of the US. According to the Centers for Disease Control & Prevention, the current proportion of population who have received at least one dose of vaccine in various key regions is as follows: California (30%), New Jersey (33%), and Georgia (23%).

Stock Impact

Transformational growth.

• Manulife US REIT highlighted that it plans to thrive in a post COVID-19 world e.g. Atlanta - Emerging tech hub, Washington DC - cloud & cyber security hub, Los Angeles - streaming capital of the world etc. Manulife US REIT remains poised to increase its tenant exposure to high growth trade sectors.

Supply not a concern.

• Manulife US REIT noted that its properties remain competitive in the market, with its rental rates generally below the White House.

Hybrid model of work still ensures demand for physical offices.

• According to PwC’s survey of US executives and workers, almost 70% of employers expect employees to work from office at least 3 days/week. In terms of the timeline, 75% of employers expect at least 50% of office workers to return to working in office by Jul 21.

Savings on refinancing.

• The group also expects cost savings from refinancing of loans. Manulife US REIT had recently obtained a US$250m sustainability-linked loan which incorporates interest rate reductions linked to predetermined sustainability performance targets.

Earnings Revision & Risk

• Adjust 2021-23 DPU forecast up slightly. We increase our 2021-23 DPU forecasts for Manulife US REIT slightly by 2%, factoring in slightly lower interest expense.

Valuation & Recommendation

• Maintain BUY on Manulife US REIT with a target price of US$0.87, based on DDM (required rate of return: 8.0% terminal growth: 1.0%).

Share Price Catalyst

• Positive newsflow on office leasing activity.
• Return to office in the US.

Source: UOB Kay Hian Research - 1 Apr 2021