2H21 a Miss, Fundamentals Sound

• Manulife US REIT (SGX:BTOU)’s results were a miss, with 2H21 DPU at +1.5% y-o-y and -2.6% h-o-h, on higher rental abatements, lower carpark income and higher vacancies. This was despite operational improvements, underpinned by strong leasing momentum and a positive rental reversion guidance into FY22.
• We see tailwinds from strengthening US fundamentals, but cut our DPUs by 5% on lower occupancies.
• Manulife US REIT's DPU visibility remains high, and well-cushioned by its low FY22-23E lease expiries and quality tenancies.

Occupancy Higher With New Assets

• Manulife US REIT's portfolio occupancy rose to 92.3% (from 90.9% in 3Q21), driven by its three new properties - Diablo Technology Park and Tanasbourne Commerce Center, two suburban office campuses; and Park Place, comprising two class-A office buildings, that were 93.4% occupied.
• Leasing activity was strong at ~200k sf, up 34% q-o-q and 240% y-o-y, with expiring leases in FY22 falling to 8.0% of NLA (from 12.6% in 3Q21).
• Rental reversion was at -0.8% for FY21 (versus +1.3% for 9M21) and would have been stronger at +3.3%, excluding Michelson. Management is guiding for similar low-to-mid single-digit positive reversion into FY22.

Tailwinds From Strengthening Recovery

• US market fundamentals are strengthening, with decline (was –1.6% q-o-q in 3Q21), while tenant incentives (TIs) eased by -c.11% q-o-q (from -2.4%), as the market’s overall rent-free period tightened to 8.2 months (from 8.9 months in 3Q21).

Gearing at ~43%, Potential Capital Recycling

• Manulife US REIT’s new assets at ~US$202m, backed undemanding at ~8.7% FY22E yield, with upside from acquisitions, as management deepens its ‘high-growth’ sector AUM.

Source: Maybank Kim Eng Research - 9 Feb 2022