Manulife REIT (SGX: BTOU) reported its Q3 2022 Business update this week and I was invited to attend the analyst’ briefing that same morning.
It’s been a while since I last attended a US office REIT briefing – and my objective is to understand how bad the macro situation there in the US and in particularly how the REIT is performing / executing against the challenge operating in that sort of environment.
As expected, we didn’t really see much improvement in the operating metrics for Q3 as the environment to operate becomes much more challenging.
Q3 portfolio occupancies dropped further to 88.1%, as compared to 90.9% in Q2 – this is mainly attributed by Emanuel downsizing at ~71k square ft (halved from 135k to 64k square ft) at Figueroa. The expectation was that the lease was originally going to expire in 2023 so I guess halved is better than none at all.
Overall rent reversion while up to 4.3% in Q3 was still largely below inflation rate so there are works to do to catch up there.
There are a couple of bright side on the other hands which is worth mentioning.
First, many new leases were executed in Q3 – in fact 56.8% were new leases that were executed in Q3, as compared to 43.2% for renewal. One notable mention was the 10-year new lease signed with a semi-conductor company at Diablo with a +7.3% passing rent above the market.
Repositioning into “Hotelisation” and “Flex” was another big theme for Manulife REIT going into the next few quarters as they began their experimentation on this concept.
Peachtree at Atlanta was chosen as a suitable asset for the hotelisation concept as it is in a healthy market of growth and nearby F&B and hotel vicinity.
It is estimated to cost over $18m over the next 2 years, with an expected internal IRR of 9% upon completion.
From a potential rent uplift, they are expected to command close to the 30% current premium nearby hotels are charging at the moment (current Peachtree passing rent of USD38 per sq ft to USD 45-55 for a competitive hotelised asset).
Flex by Plaza is another theme that the management is trying to experiment in order to boost its organic premium passing rent. It is expected to commence work from Q2 2023 to 1H 2024.
Balance Sheet Health, Refinancing, Outlook
There is an upcoming refinancing of $105m due by FY2022 which the REIT is expected to secure a refinancing shortly. With interest rates rising, this will likely be locked in at a higher interest rate than the current weighted average of 3.34%.
Gearing is at 42.5% and ICR is at 3.4x, a little precarious at the moment given the macro environment but assets will have to fall by ~20% in order for the trigger to be alarmed. Still, it’ll be nice to be more prudent thinking about the worst-case scenario than not.
On the outlook, we should not see a quick rebound as both the macro-economic and execution factors are still in play. The yield and quality of assets may be enticing for longer term investors, but tailwind risks still remain at this point (as with most companies facing the same predicament).
Personally, I think I’ll start accumulating near the low $0.3+ if I have an extra funds to do so but there are many low hanging fruits at the moment that most things are competing for our limited money here.
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