Manulife US REIT - Too Cheap To Ignore
- Manulife US REIT (SGX:BTOU)'s Portfolio occupancy declined further by 0.6ppt q-o-q to 91.7% vs 92.3% in 4Q21, mainly from Exchange (-2.1ppt q-o-q), Peachtree (-1.7ppt q-o-q), and Figueroa (-1.2ppt q-o-q). However, Michelson’s occupancy is slowly improving to 89.2% vs 87.2% in 4Q21.
- The TCW Group expressed its intention to vacate Figueroa when the lease expires in Dec 2023. The TCW Group, Manulife US REIT’s second largest tenant contributing 3.9% of GRI, may move into another building, taking up a smaller space. Passing rents are currently at ~9.9% below market rents. While the upcoming vacancy is substantial, Manulife US REIT has ample time to market and backfill the space until the TCW Group leaves in Dec 23, and hopefully, will be able to ride on the office upcycle, coming out from the pandemic.
- While leases signed in 1Q22 appear to be a little soft, at ~68k sqft, rental reversions recorded a positive improvement, at +3.9%. Management maintains its FY22 outlook on rental reversions at low to mid-single digit positive reversions.
- Manulife US REIT expects minimum impact from rising utility costs, which comprises ~11% of opex, as these costs are largely passed through and borne by its tenants.
- Manulife US REIT has obtained commitment to refinance debt expiring in FY22F at an average interest cost of 3.4%. We estimate average cost of debt could creep up closer to 3%, vs 2.86% as at 1Q22 post the refinancing.
- Change of leadership. Jill Smith announced her retirement effective 6 May 2022 and Tripp Gantt, the newly appointed deputy CEO, will succeed Smith as the new CEO.
- We maintain our BUY rating for Manulife US REIT but lowered our target price to US$0.70, to incorporate a higher risk-free rate of 3.5%, and roll forward our DCF valuation to FY23F. We reduced our FY22F-FY23F DPU estimates for Manulife US REIT by ~6% to ~10% to factor in a slower pace of recovery and some potentially upcoming vacancies.
- Manulife US REIT's share price has trended down to below the pandemic trough of March ’20. At this level, we believe downside risks could be limited.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-05-26 2022-05-26
Read also DBS Research's most recent report:
2022-11-03 Manulife US REIT - When The Going Gets Tough, The Tough Get Going
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