The manager of Manulife US REIT (MUST), led by new leaders who were appointed June 30, is focusing on the right dispositions and deleveraging, says RHB Bank Singapore analyst Vijay Natarajan.
John Casasante is the new CEO and CIO of the manager. Mushtaque Ali, from sponsor Manulife, is the new CFO of the manager.
MUST’s operational performance for 1HFY2024 ended June was in line, says Natarajan, with a “glimmer of a sign” that market conditions are stabilising. US office leasing volumes are starting to point to a pick-up, with some normalisation in return-to-office trends.
In an Aug 6 note, Natarajan maintains his “trading buy” call on MUST with an unchanged target price of 12 US cents. A “trading buy” call by RHB means MUST’s share price may exceed 15% over the next three months, however the longer-term outlook remains uncertain.
Following an Aug 5 briefing for analysts and media, Natarajan says MUST’s disposition plan is on track, with three unidentified assets on the market.
Management has not shared the names of these assets due to the sensitive nature of the transactions, but has kept its target of US$100 million in asset divestments by the year-end.
See also: Asset disposals ‘worth the wait’, even with penalty fee: MUST chairman
That said, this is later than initially announced; management had previously indicated that the asset disposals should be complete “by 2QFY2024 or 3QFY2024”.
A key consideration for disposition will be the need for incremental capital to be spent on the asset versus potential returns. “MUST is willing to sell assets at a discounted price if necessary. There has been a noticeable increase in purchasers’ interest for its assets, from both institutional and high-net-worth investors,” notes Natarajan.
In 2QFY2024, MUST’s occupancy was stable q-o-q at 78.4% compared to 78.7% in the previous quarter.
See also: Top leaders at US office S-REITs announce resignations
Leasing momentum remains positive with 428,000 sq ft of leases executed in 1HFY2024, despite the challenging conditions in some of MUST’s submarkets, says the manager. Representing 8.5% of portfolio net lettable area (NLA), these leases have a long weighted average lease expiry (WALE) of 7.3 years.
The bulk of leases signed in 1HFY2024 comprised renewals (75.8%), while new leases made up 13.8%, and expansions the remaining 10.4%.
The largest lease signed was for Amazon, the anchor tenant at 10 Exchange Place (Exchange) in Jersey City, New Jersey, and one of MUST’s top five tenants. Prior to the renewal, its lease was previously due to expire in April 2025.
Rent reversion for the 1HFY2024 leases was at negative 10.6%. Natarajan believes this was dragged down by the Amazon lease extension.
According to management, the REIT’s leasing pipeline remains healthy, at 1.4 million sq ft, with 80% of this at the proposals stage. “Management expects the easing of the labour market to result in a higher return-to-office rate, which should boost its leasing momentum,” writes Natarajan.
Adjusted to exclude Tanasbourne and Park Place, which were sold in April 2023 and December 2023 respectively, MUST’s same-store 1HFY2024 gross revenue was down 8.1% y-o-y while net property income (NPI) was down 16.7% y-o-y.
This was due mainly to the exit of a key tenant, TCW, at the start of the year, and downsizing at The Children’s Place, another key tenant.
NPI margins, however, came in below Natarajan’s expectations on higher leasing commissions and higher insurance premiums.
Around 80% of MUST’s debt is hedged, and its new policy is to keep 50%-80% of debt hedged on the expectation of interest rate cuts.
As at June 30, MUST’s unencumbered gearing ratio and aggregate leverage ratio held steady at 60.0% and 56.3%, from 59.7% and 56.7% respectively as at March 31.
MUST has halted distributions until end-2025 as it rolls out its recapitalisation plan to address rising gearing and falling valuations.
Natarajan cut his NPI margin assumptions for FY2024 and FY2025 on the back of higher opex and tenant incentives resulting in 12% and 11% lower available distributable income respectively. He also expects no distribution payments until FY2026.
As at 11.19am, units in MUST are trading 0.3 US cents (0.4 cents) higher, or 4.29% up, at 7.3 US cents.
