KGI Research analyst Joel Ng has upgraded Manulife US REIT (MUST) to “outperform” albeit with a lower target price of 82 US cents from 86 US cents previously.

The upgrade comes as US office properties look set to see improving demand as more employees return to the office, even if it’s on a part-time basis.

“Improving fundamentals may finally lift investor confidence in the sector,” Ng writes in a Sept 7 report.

In addition, MUST’s management previously indicated that it has seen an acceleration in leasing activity. Around 60% of the REIT’s tenants have said that they plan to return to the office from September, which may lift revenue such as car park income.

MUST has a committed occupancy rate of 91.7% and only 2.9% of leases by net lettable assets (NLA) due over the remainder of 2021, notes Ng.

On the back of easing restrictions and a higher vaccination rate in the US, Ng says he foresees a larger percentage of the population returning to the workforce in 2021.

To him, MUST offers a “decent yield” of 7.4%, 7.5% and 7.6% for FY2021, FY2022 and FY2023 respectively.

“MUST’s gearing of 42.1% as of 30 June 2021 remains well below the regulatory 50% limit, while borrowing costs have declined to 2.99%, an improvement of around 20 basis points from December 2020,” he writes.

That said, risks include tax changes in the US, as it would negatively impact MUST’s distribution per unit (DPU).

“Forex risks [are also a downside] for local investors as revenues, unit price and dividends are in USD. Another potential risk from the impact of Covid-19 is the increased acceptance of work from home and higher-than-expected working from home rate, which may lead to soft office demand,” he says.

Units in MUST closed flat at 73 US cents, with an FY21 P/B of 0.8 times and dividend yield of 7.4%.

Photo: MUST