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Can Manulife US REIT avoid buyer's remorse?

Jovi Ho
Jovi Ho • 6 min read
Can Manulife US REIT avoid buyer's remorse?
With falling DPU and occupancy rate, will investors’ patience run out before grey skies clear?
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At a media briefing last November for Singapore-listed Manulife US REIT’s 3QFY2021 results, CEO Jill Smith said: “How do I view the outlook of our portfolio? After the darkness of last year, here comes the sun.”

Smith certainly had something to cheer about. The following month, Manulife US REIT brought three office properties into its fold.

Its first pandemic-era shopping spree saw it pick up Tanasbourne Commerce Center in Oregon, along with Park Place and Diablo Technology Park in Arizona, for a total of US$201.6 million ($273.3 million).

Manulife US REIT’s stable has expanded to 12 properties. This is part of the REIT’s strategy to enter “high-growth markets” with greater exposure to technology and healthcare tenants, says Smith. “These were our first acquisitions in two years. These three acquisitions, with a distribution per unit (DPU) accretion of 2.8%, will raise our assets under management in growth markets to 29%, and our exposure to such tenants to 12.8%.”

The suburban office campus Tanasbourne, for example, stands to benefit from population and company migration to a “magnet city” like Portland, Oregon, she adds.

See also: Paragon REIT to divest The Rail Mall for $78.5 mil

Smith is bullish on office recovery in the US. Citing reports from JLL, the US office leasing market closed out 2021 with 156.9 million sq ft of leases executed for the year, a 14.6% growth y-o-y, with 44.6 million sq ft of leasing volume in the fourth quarter.

The REIT also highlights how US unemployment has recovered from a peak of 14.8% to 3.9% at the end of last year. “From the middle of the year, the US office market started to rebound as transactions and leasing improved, resulting in leasing activity increasing 13.8% from 3Q2021 to 4Q2021, whilst tenant improvement allowances eased 11.4%,” says Smith.

But the question now is: Will investors’ patience run out before these grey skies clear?

See also: Sabana Industrial REIT prices $100 mil 4.15% sustainability-linked bonds due 2029

Falling DPU, occupancy rate

In February, Manulife US REIT reported a DPU of 5.33 US cents for FY2021 ended Dec 31, 2021, down 5.5% from the FY2020 DPU of 5.64 US cents.

This extends the former 5.4% drop in FY2020 DPU from 5.96 US cents in FY2019.

Manulife US REIT blames higher rental abatements, lower car park income and lower rental income from higher vacancies during the period. This was partly mitigated by the net reversal of provision for expected credit losses, says the REIT manager.

As at end-December, Manulife US REIT enjoyed a “high” occupancy rate of 92.3% and a “long” weighted average lease expiry (WALE) of 5.1 years.

But looking at the REIT’s performance since listing and the impact of Covid-19, it becomes obvious: Full-year DPU, for one, peaked at 5.96 US cents in FY2019. The latest full-year payout of 5.33 US cents is the lowest in the REIT’s five and a half years since going public.

The weighted average lease expiry (WALE) of its properties also tell a similar story. The supposedly lengthy WALE of 5.1 years is its lowest full-year figure ever, down from 5.8 years at listing and a peak of 5.9 years in FY2019.

For more stories about where money flows, click here for Capital Section

Manulife US REIT also managed to reverse a US$43.3 million loss in FY2020 to report net income of US$39.4 million in FY2021.

To fund the acquisition of three new properties in December 2021, however, Manulife US REIT undertook debt financing and issued 154,084,000 new units in a US$100 million private placement, thinning out an already diluted FY2021 DPU of 5.33 US cents, down 5.5% y-o-y.

Distributable income in FY2021 fell to US$85.6 million, down 3.8% y-o-y. Thanks to the acquisitions, portfolio occupancy rate rose to 92.3% from 90.9% in 3QFY2021.

Compared to FY2020’s occupancy rate of 93.4%, however, the figure is still down y-o-y.

Manulife US REIT has quadrupled its building count since listing, with net lettable area (NLA) growing from 1.8 million sq ft to 5.4 million sq ft. But with great NLA comes great responsibility: At its debut in 2016, 97% of its three properties were occupied, a figure it has failed to match in five full-year results since.

Michelson and Plaza

Gearing is at a historical high of 42.8% and Manulife US REIT has US$207 million in loans due in 2022. Thus, the REIT will most likely undertake recycling opportunities instead of sizable acquisitions this year.

The managers of Manulife US REIT plan to divest some assets and recycle capital into high-growth markets, thereby rebalancing its portfolio, writes RHB Group Research analyst Vijay Natarajan.

Could its worst-performing assets be on the chopping block? 2HFY2021 saw the REIT’s portfolio valuation turn positive for the first time since Covid-19.

Excluding the three recent acquisitions, the valuation of Manulife US REIT’s nine properties rose 0.4% over the six months to US$1.98 billion as at Dec 31 last year.

Among the nine properties, however, a third saw their valuation shrink during the period.

Michelson — a 19-storey Trophy-quality office building, located in Irvine, Orange County, California — saw its valuation fall 1.2% h-o-h to US$317 million as at Dec 31, 2021.

Among the trio of properties in the REIT’s IPO portfolio, Michelson is the only property whose valuation has fallen overall. It was valued at US$317.8 million at Manulife US REIT’s debut on May 20, 2016.

In FY2021, the REIT executed leases amounting to some 654,000 sq ft or 12% of the portfolio by NLA, at an average rental reversion of about 0.8%. Excluding Michelson, the rental reversion for executed leases in FY2021 would have been 3.3%.

The expiring rents in its portfolio in 2022 are currently 2.1% below market rents. There are no lease expiries in Michelson in 2022.

Meanwhile, Plaza — an 11-storey Class A office building located in Secaucus, New Jersey — saw its valuation fall 6.2% h-o-h to US$106.0 million as at Dec 31, 2021 — the steepest devaluation among the properties for the period.

The property was Manulife US REIT’s maiden acquisition in the US. In a July 20, 2017 press release announcing the acquisition, Plaza was valued at US$116 million as at March 31, 2017. Plaza’s valuation has fallen 8.62% since its acquisition, the steepest devaluation among Manulife US REIT’s properties.

“I would say that we are at an inflection point,” says Smith. “Although Omicron made a dent in occupancy, and everybody held their breath at the end of last year, actually, the numbers suggest that actually the market, and particularly US office and leasing, have powered on.”

She adds: “Of course, it is still a tenants market; there’s no doubt about that. But certainly, the pendulum is swinging back towards landlords and we enjoy that relief.”

Unitholders hope to soon share in that relief as well.

Photos: Bloomberg, Infographics: Desmond Chua/The Edge Singapore

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