Manulife US REIT - When The Going Gets Tough, The Tough Get Going
- Manulife US REIT (SGX:BTOU)'s portfolio occupancy declined further by 2.8ppt q-o-q to 88.1% in 3Q22 (including leases signed up till 18 Oct 22) vs 90.9% in 2Q22, mainly due to Quinn Emanuel’s downsizing (71k sqft/~10% at Figueroa), highlighted previously.
- See Manulife US REIT's announcement dated 02 Nov 2022 for its 3Q22 business update:
- Manulife US REIT signed a 10-year lease with a semi-conductor company at Diablo securing rents that are 7.3% above passing rents. While leases signed in 3Q22 appear to be a little soft, at ~61k sqft, rental reversions recorded a positive improvement, at +4.3% in 3Q22 (1.7% for 9M22).
- Manulife US REIT embarks on the hotelisation of its Peachtree asset, which will drive potential rents ~30% above passing rents. The estimated capex is US$18m over two years with an expected IRR of ~9%.
- Flex by JLL at Plaza is expected to see progressive completion from 2Q23 to 4Q23/1H24. The estimated cost is US$6.8m. Similarly, it is expected to drive potential rents to reach a ~30% premium compared to market rents.
- Management expects portfolio occupancy to hold steady for the rest of the year, and maintains a positive outlook on reversions coming in at low to mid-single digits.
- Observations at Manulife US REIT’s submarkets appear to suggest mixed signals, with leasing volume seeming sluggish but net effective rents rebounding off the low recently; subleasing has picked up recently. However, Manulife US REIT’s portfolio seems to see a stable trend in tenant incentives and low sublease space of 3.7% currently.
- Physical occupancy remains at an average of 30%.
- As part of its longer term strategy, management spoke about portfolio repositioning, recycling, and rejuvenation. Management highlighted that its top priority is capital management with a keen eye on gearing but said that its portfolio disposition is ongoing. Management could be open to portfolio diversification.
- Manulife US REIT's gearing held relatively stable at 42.5% vs 42% in 2Q2022 but average cost of debt increased by 0.3ppt q-o-q to 3.34% in 3Q22.
- Manulife US REIT will be refinancing its FY23 debt expiry of US$105m (~11% of total debt) by FY22.
Manulife US REIT – Valuation & Recommendation
- We maintain our BUY rating on Manulife US REIT but lower our target price to US$0.48 from US$0.70 to factor in a higher risk-free rate and interest rates. We lower our FY22F-FY23F DPU estimates for Manulife US REIT by 8% to 14%, taking a more conservative stance to factor in potential vacancies, the impact from higher interest rates, and slower recovery post 2024.
- Manulife US REIT's share price has declined close to 50% year-to-date. Currently, it is trading at FY23F headline yield of 13%, based on our conservative estimates. Our target price implies a yield of ~10% in FY23F. We believe the headwinds are largely priced in and it is at an interesting level to monitor for any turn in macroeconomic sentiment/outlook in the near term, in our view.
- Despite the challenging environment, Manulife US REIT continues to rejuvenate and refresh its assets to ensure the resiliency of its portfolio.
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/ 2022-11-03 2022-11-03
Previous report by DBS:
2022-05-26 Manulife US REIT - Too Cheap To Ignore.