Manulife US REIT (UOB KayHian Research)

Lower overall occupancy

2Q22 overall portfolio occupancy fell 1.7ppt qoq to 90.0%, driven by non-renewals and downsizing in existing properties (Figeuroa, Exchange, Penn and Capitol). Large tenants have been re-evaluating their office spaces amidst growing adoption for hybrid working arrangements. Two of MUST's top 10 tenants by gross rental income, TCW group (3.8% of GRI) and Quinn Emanuel (2.9% of GRI), have plans to vacate by end-23 and have already downsized its offices in MUST's Figeuroa asset. To backfill these vacancies, MUST has been in negotiation with prospective tenants to take over these vacated spaces, which we reckon may take time.

Hotelisation of its assets

To ensure its properties remain competitive and command premium rents, MUST has initiated several initiatives such as partnering with best-in-class flex operators to reinvest in its existing office spaces. In Sep 22, MUST partnered with Flex by JLL to take up 15,407sf (3.3% of NLA) of office space in Plaza with an additional 20,451sf (4.4% of NLA) in subsequent phases by 2023, providing enterprise-grade flexible space solutions at an expected stabilised rent premium of 30% to market.

Impact of rising interest rates

As of end-2Q22, 85.7% of MUST's borrowings were fixed-rate loans. MUST guide that every 1% increase in interest rates will impact DPU by 0.079 US cents, which is a roughly 1.5% impact on DPU. With the Fed raising interest rates at an unprecedented rate, we have increased our risk-free rate assumptions and decreased our 2023-24 DPU forecasts by 2-3%, causing our target price to drop from US$0.74 to US$0.63. The recent selling is overdone and most of the negatives have been priced in.

Risks

- Escalation of the Russia-Ukraine war beyond Ukraine.

- Persistent and elevated inflation causing more rate hikes in 1H23.

Maintain BUY with TP US$0.63.

@TigerStars