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Portfolio occupancy dipped in 3Q22 but reversions improved qoq to +4.3%.
Near-term focus is on portfolio repositioning and capital management.
Reiterate Add with a lower TP of US$0.69.
Highlights from 3Q22 business update
Manulife US Reit (MUST) achieved a lower portfolio occupancy qoq at 88.1% as at 3Q22 (vs. 90% at end2Q22), due mainly to lower take-up at Figueroa as major tenant Quinn Emanuel downsized its space by 71k sq ft,
Physical occupancy at MUST’s buildings average 30+% as at end-3Q. Portfolio weighted average lease expiry stood at 4.9 years as at end-3Q.
Positive rental reversion of 4.3% in 3Q
MUST signed 61k sq ft of leases in 3Q22 (254k sq ft YTD), of which c.57% are new leases. New demand came from real estate, finance and insurance, professional services and advertising sectors.
It achieved positive rental reversion of 4.3% in 3Q (+1.7% YTD) and maintained its guidance for positive mid-single-digit reversions for FY22F.
MUST has a balance of 1.3%/10.1% of leases expiring in 4QFY22F/FY23F. With TCW Group deciding to vacate its space when its lease expires in Dec 2023, we anticipate that MUST’s portfolio occupancy could come under pressure in the medium term.
According to property consultant Jones Lang Lasalle, the US office leasing market remains mixed with sluggish leasing volumes, although net effective rents have been recovering, on the back of tenants’ flight to quality.
MUST’s portfolio repositioning strategy includes a hotelisation exercise at Peachtree in 1H23 involving a makeover for the grand entrance, lobby, conference centre, coffee bar/lounge and outdoor terrace area.
Management expects this exercise to generate an IRR of 9%. In addition, Plaza is slated to embark on providing flexible space solutions such as spec suites and co-working spaces progressively from 3Q22.
MUST expects the two asset enhancement initiatives to cost a total of US$24.8m.
Funding cost hiked up qoq
In terms of capital management, MUST’s all-in cost of funds rose to 3.34% with interest cover of 3.4x as at end-3Q22. With end-3Q22 gearing at 42.5%, MUST indicated that it will look to reposition, recycle and rejuvenate its portfolio.
Its top priority would be to manage its gearing, including asset recycling. In addition, it has formed a Strategic Working Group to explore growth opportunities including potential pivot into other asset classes, as well as strategic partnerships, JVs or M&As.
Valuation/Recommendation
Retain Add rating. We lower our FY22-24F DPU estimates by 2.1-3.49% to factor in a higher debt cost. Our DDM-based TP is lowered to US$0.69, due to reduced earnings estimates and higher cost of equity assumption of 8.44% (vs. 7.84% previously).
Our forecast of 14.2% FY22F dividend yield prices in much of the slower near-term growth.
Manulife US Reit share price chart
You can find the full report here and the company website here
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