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Headwinds in 2020 largely in the price as Manulife US REIT looks forward to 2021

The Edge Singapore
The Edge Singapore  • 3 min read
Headwinds in 2020 largely in the price as Manulife US REIT looks forward to 2021
Manulife US REIT announced a 5.4% y-o-y decline in DPU to 5.64 US cents as manager looks to business parks for growth in 2021
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Manulife US REIT announced a 5.4% decline in distributions per unit to 5.64 US cents in FY2020. During a results briefing, Jill Smith, CEO of MUST’s manager attributed this to provisions for expected credit loss, and a sharp reduction in car parking income. While gross revenue rose 9.3% to US$194 million in FY2020, property expenses rose 17% to US$78.5 million. Net property income (NPI) in FY2020 rose 5.6% to US$115.8 million. MUST’s 2H2020 was weaker than the first where gross revenue rose just 1.2% while property expenses rose 16.5% resulting in an 8.3% y-o-y decline in NPI to US$53.6 million.

In FY2019, car parking income contributed around 7% to gross revenue and last year, MUST collected just 25% of car park income compared to a normal year.

Smith believes that the vaccine rollout in the US coupled with cabin fever is likely to support demand this year. “The vaccine rollout and bosses wanting workers to report to the workplace will lead to a gradual reopening of the US economy,” she says.

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At any rate, peak Covid is probably over in the US. However, it has wreaked some damage on MUST. Centrepointe in Fairfax County Virginia, had a lease renewal in 4Q2020 that resulted in a double digit decline in rental reversions. “In 4Q2020, we had a double digit negative reversion due to one tenant in Centrepointe that was marked to market. That was a huge [negative reversion] similar to Hyundai’s in Michelson in 2019,” Smith explains. “If we strip out the single tenant, rental reversions for the year would be a positive 4.7%,” she adds.

MUST’s rental reversions are based on the expiring rent of the lease compared to the rent of the new lease. Elsewhere, Smith said MUST also had lower rental income because of higher vacancies at Michelson in Irvine, and Peachtree in Atlanta.

This year, 5.8% of MUST’s portfolio by gross rental income (GRI), and 5.7% by net lettable area (NLA) are up for renewal. In 2022, 17.8% by GRI and 18.1% by NLA are up for renewal. Most the leases 2021 and 2022 leases are from Figueroa, Penn in Washington DC and Capitol in Sacramento. None of the buildings are likely to have sharp negative reversions. “Our portfolio’s in-place rents continue to be below market and we hope to capitalise on modest rental reversions in the next two years,” Smith says.

SEE: Analysts still positive on Manulife US REIT despite slow 3Q20

Ever the optimist, Smith prefers looking forward, to continued portfolio growth, with an emphasis on accretive acquisitions. However, MUST is taking a pivot. Business parks are in its sights, and the manager would consider a portfolio with the view of the portfolio vendor becoming a partner. As an example, ARA LOGOS Logistics Trust (ALOG) placed out $70 million worth of units to Ivanhoé Cambridge China Inc, a fund manager which owns stakes in two funds acquired by ALOG. Since the start of this year, ALOG’s unit price is up more than 18%.

“We’ve always been Class A and trophy. We’ve built a solid portfolio with government tenants, but there are different growth sectors. So we can go up to 20% for these high quality [tech] tenants who maybe in business parks,” Smith says.

MUST’s unit price closed at 71 US cents, down 5% since Jan 4 and translating into a yield of 7.9%.

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