Manulife US REIT - DBS Research 2022-11-03: 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.