We believe that this solid foundation will provide flexibility to evolve and diversify further by seizing growth opportunities that may emerge in the aftermath of Covid-19. During this pandemic, MUST continues to seek accretive acquisitions. Our investment criteria include acquiring in locations with strong demographics and compelling fundamentals, Trophy/Class A assets, long weighted average lease expiry (WALE), and high occupancy and live, work and play environment.
2. Manulife US REIT was the first pure-play US REIT listed in Asia. Why did you choose to list in Asia and specifically Singapore?
Our sponsor, The Manufacturers Life Insurance Company, is part of the Manulife group with an established business in Asia for over 100 years. During the GFC, Manulife saw that the recovery in Asia was much faster than in the US. Hence, Manulife swung its attention to growing its Asia business which was, at that time, less than a quarter of revenue. Today, Asia accounts for close to 35% of Manulife’s business.
Unknown to many, Manulife has over 80 years of experience in commercial real estate through a vertically integrated platform and manages everything from the plumbing to the high finance. MUST’s listing in Singapore was a part of Manulife’s strategy to raise its profile in Asia.
3. Describe the REIT’s financial performance for 1HFY2020. How do you expect the full year financials to be affected under Covid pressure?
Despite the pandemic, MUST’s portfolio delivered a 20% y-o-y increase in distributable income to US$48 million in 1HFY2020 ended June while DPU grew 0.3% y-o-y to 3.05 US cents. Rental collection remained close to 96% in 2QFY2020, with only 0.3% rental deferment and 0.3% rental abatement by gross rental income (GRI) provided to our tenants in 1H 2020.
Our gearing of 39.1% also remains below the MAS requirement of 50% and we have no refinancing due for the remainder of this year. To provide for corporate, working capital and unforeseen events, we have total undrawn facilities of US$135 million.
With a high occupancy of 96.2%, long WALE of 5.7 years, 3.4% expiries this year and no break clause options in US office leases, we believe that our well-anchored portfolio should be able to ride out the crisis.
4. Describe the REIT’s portfolio tenant mix. Would you maintain or change this mix?
Our well-diversified tenant base comprises numerous multinational corporations from 17 different trade sectors. Our top 10 tenants, which make up 34.7% of GRI, have a long WALE of 6.3 years, and the majority of them are listed firms, government or company headquarters. Going forward and leveraging on our diversified tenant base, we will seek tenants from a blend of the professional, technology and healthcare sectors.
5. Describe the REIT’s WALE profile. What has changed in your leasing profile post-Covid and how will you maintain an optimal WALE going forward?
As at June 30, MUST’s portfolio has a WALE by NLA of 5.7 years. We achieved strong leasing momentum in 1HFY2020 by signing long leases with high-quality tenants from the finance and insurance, legal, real estate and technology sectors. Despite the pandemic, approximately 217,300 sq ft of leases (4.7% of portfolio) were executed with a long WALE of 6.9 years and rental reversion of +7.9%.
Going forward, only 3.4% and 5.7% of portfolio leases by NLA will be expiring in 2020 and 2021, respectively. The bulk of portfolio leases, or 55.1% by NLA, will only expire in 2025 and beyond.
On the leasing front, we are starting to see enquiries in some of our assets. However, we do not expect tenants to be rushing into making major long-term decisions. With the ongoing pandemic, we will continue to drive leasing and will remain flexible to ensure a high occupancy for our portfolio.
6. How does Manulife US REIT plan to sustain its performance amidst the slowing US economy?
Our strategy to fortify MUST’s portfolio through owning top-quality buildings is paying off. We have a diversified trade mix of tenants in resilient trade sectors, such as government, legal and finance, blended with companies from across the fast-growing technology and health sectors. The majority of our tenants are listed companies and government agencies, with more than a third being HQ locations. To date, we have not seen tenants asking for a reduction in space, but have had tenants expand their space in 2QFY2020.
To conserve cash, we are rescheduling some enhancements and focusing only on essential work. MUST is mandated under its trust deed to distribute at least 90% of its annual distributable income. With our strong collections to-date, we look to pay out 100% of distributions.
7. How has Covid-19 affected your operating conditions? What measures have you put in place to mitigate the impact?
MUST’s nine office buildings remain open and are 10% to 20% occupied with most tenants working from home. Despite the economic slowdown, we have collected the majority of the rents for 1HFY2020. We are also conducting virtual leasing tours to attract potential tenants for property viewings. To prepare for our tenants’ gradual return to the office, we have upgraded our buildings’ air filters, increased frequency of cleaning, and issued a comprehensive guidebook on health and safety. We are working closely with our tenants to ensure that they can return to a safe environment.
8. How has Covid-19 changed US office demand? What strategies will the REIT implement to manage changing demand dynamics in the post-Covid landscape?
Covid-19 has caused unprecedented disruption, but opinions remain divided on the future demand of office. Work from home (WFH) was introduced in the US since the 1990s, and recent research shows that only an incremental 2% of US employees prefer to WFH full-time due to the pandemic.
Many employers also view the office space as essential for the company’s culture, innovation, talent retention, productivity and more. With employees’ health and safety needs being a top concern, hot-desking could become obsolete and tenants may even require more space to meet social distancing requirements.
We expect MUST’s properties, mostly located in suburban locations, to be favoured by tenants versus dense gateway CBD offices where the use of public transport is required. Even prior to Covid-19, there were limited Trophy/Class A supply in our cities, and we do not expect new developments amid the current uncertainty. Nevertheless, we are watching for trends to emerge post-pandemic and will shift our strategy accordingly.
9. What is the REIT’s value proposition to its shareholders and potential investors?
Since MUST’s entry into the FTSE EPRA Nareit Global Developed Index in December 2019, we have attracted more global funds, which promote stability and enable greater agility in our growth strategy. Institutional investors now make up close to 60% of our shareholdings as we trade close to 5 million units a day.
We believe that WFH has minimal impact on the demand of offices in the US. Particularly, MUST’s top sectors (technology, insurance, healthcare, legal and finance) were early adopters of WFH and we do not expect a shift in their office space needs.
The US office market is in much better shape now than during the GFC — there is little oversupply, leverage is lower and approximately 90% of office leases are longer than two years. However, if the slowdown continues, we do expect sellers of distressed properties to appear, which could lead to acquisition opportunities for MUST.
10. What do you think investors may have overlooked about Manulife US REIT’s business?
We have built a top-quality defensive portfolio which reflects our strong belief that Trophy/Class A assets provide strong income in upcycles and remain resilient during market turmoil. We also fortified MUST’s portfolio by choosing locations with growth potential and are well sought-after by tenants for their live, work and play appeal.
Our freehold portfolio has built-in rental escalations of approximately 2% per annum with no break clause in the leases. Most of our properties are competitively positioned, at 5% to 10% below market rents, which will provide a buffer during this downturn.
We deliberately sought creditable tenants from a wide range of sectors to diversify our net property income, and we are fortunate that few of our tenants are from sectors that were badly affected by the shutdown.
