Insights on US Office Market organised by Manulife US REIT (MUST)

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On July 12, 2023, REITsavvy is delighted to have received an invitation from Manulife US REIT (“MUST”) [SGX:BTOU] to attend an exclusive media-only session, where we will have the opportunity to hear directly about the US Office Market Update. Kenny Loh and Xavier Koh are particularly thrilled to be attending this event and gaining valuable insights firsthand.

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Highlighted Takeaways from the Session: Key Insights on US Office Market

1) Expecting strong momentum as companies encourage employees to return to the office

Currently, employee back-to-office attendance still remains low. Looking ahead, employers introduce new Return to Office (RTO) Mandates. Employers prefer their employees to be back in offices.

MUST 12 Jul 2023 P1

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2) Remote jobs openings declining

Companies now open up lesser remote jobs which might signal a preference for employees to be present in the office.

MUST 12 Jul 2023 P2

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3) Declining leasing activity in Q1 2023

Leasing activity shows a promising 37% increase from 2020 to 2022, but recent Q-o-Q decline of -10.7% signals waning momentum. As of now, the leasing levels have yet to fully recover to Pre-COVID Levels.

The rise in interest rates prompts occupiers to adopt a more defensive approach in leasing decisions.

MUST 12 Jul 2023 P3

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4) Lowest large-scale leasing activities for the recent quarter

It was surprising that Q1 2023 is the lowest leasing activities since the pandemic began. However, in Q2 prelim data, the leasing activities are picking up which might provide recovery signals even though it is still below the pre-pandemic average.

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5) Lease expiry remains high

The lease expiry within the office space remains high for the next few years. This is due to more short-term leasing deals that are done during the pandemic.

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6) Limited new office constructions which drive down the new office supply 

The reduction of new development was also due to increasing financing and production cost. In 2.5 – 3.5 years time, there might not be enough new quality development to absorb demand.

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Conclusion

The US Office Market faces several obstacles that impede its progress.

To envision a more favourable future for this market, we will closely monitor the following factors:

  1. The actual end of the Interest Rate Hike by the Federal Reserve: This will enable investors and REIT managers to make more accurate forecasts regarding the expenses required to finance the current and future expansion of REITs.
  2. Employers require additional time to determine the optimal blend of remote and physical work environments: This will allow them to make more informed decisions regarding longer lease periods.
  3. Improvement in the valuation of US Office REITs through a more favourable leasing environment: This will occur when companies observe signs of their business picking up, leading to increased confidence and demand for office spaces.

During this uncertain period, it is prudent to invest safely and wisely by understanding the fundamental aspects of each REIT.

Continue ReadingInsights on US Office Market organised by Manulife US REIT (MUST)

Q&A with Manulife US REIT

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One year ago, I covered Manulife US REIT’s declining property valuation. However, MUST’s portfolio valuation has continued to decline. The recent earnings results have documented a -10.9% portfolio valuation decline y-o-y as of 31st December 2022, increasing its gearing ratio to ~49%. This is close to the gearing ratio limit of 50% for REITs. I have therefore asked the following questions, on how MUST can reduce its gearing ratio as well as stem the constant portfolio valuation declines.

MUST’s NAV trend since Q3 2016.

MUST’s Gearing Ratio trend since Q3 2016.

  • What is the probable gearing ratio at the end of the year if: (1) a more reasonable cap rate used; and (2) if MUST is able to find new tenants to replace old ones who have decided to exit?
  • The current valuation may be too conservative and planned for the worst-case scenario. Will MUST revalue its properties again in mid-year if there are significant changes in the assumption?

“We will be working to reduce our gearing through various options such as asset dispositions, distribution reinvestment plan, capital injection, discussions with capital partners and so on. We aim to bring our gearing below 45%. The strategic review is also ongoing, with healthy interest from a broad range of counterparties, including local and international developers, REITs and private equity. We expect to provide further updates on the strategic review in 2Q 2023. Meanwhile, the weighted average cap rate of MUST’s portfolio has increased slightly from 6.0% as at Dec 2021 to 6.3% as at Dec 2022. With more clarity on rate hikes and banks easing their lending, we should see some impact on cap rates. It is still early days. As for TCW, the tenant vacating from Figueroa by the end of the year, we have a couple of prospects who have toured the space a few times and we continue to engage them. For valuations, we will continue with yearly valuations in line with MAS regulations and our SREIT peers.” – a MUST spokesperson

MUST’s ESG ratings and transparency is commendable

Despite the poor performance in terms of portfolio valuation and gearing ratio, MUST’s strengths are in the areas of ESG. In the GRESB Real Estate Assessment, it has attained 5 stars, as well as the highest “Negligible” risk rating by Sustainalytics.

Kenny Loh is an Associate Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.

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MCT & MNACT Merger: Interview with MNACT’s CEO (Part 2: Exclusive Insights)

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Back in Part 1, I had the opportunity to speak to Mapletree Commercial Trust’s CEO, Ms Sharon Lim, about questions regarding the merger. This is Part 2 of the interviews with both CEOs of MCT & MNACT, regarding the proposed merger. In Part 2, I speak to MNACT CEO, Ms Cindy Chow, regarding the latest FY21/22 results and regarding the merger with MCT.

 

Resources

Mapletree Commercial Trust

Mapletree North Asia Commercial Trust

 

FY21/22 Results

Based on the latest update, Gateway Plaza has -24% average rental reversion whereas The Pinnacle Gangnam has +44% average rental reversion. What are the reasons for such performance, are there structural changes on the underlying environment? Would this trend continue into the next few quarters, and how does it affect the DPU?

Gateway Plaza

  • In Beijing1, new supply in the central business district (“CBD”) with more affordable rental rates as well as relocations of tenants to decentralised office areas (such as Wangjing) to achieve cost savings, have resulted in rental declines in office districts such as Lufthansa.  Gateway Plaza is an office building located in Lufthansa, a well-established commercial hub in Beijing.
  • The MNACT Manager had, and continues to prioritise high occupancy level at Gateway Plaza, to minimise downtime and ensure cash flow stability. As a result, occupancy rate improved from 92.9% as at 31 March 2021 to 94.3% as at 31 March 2022. However, rental rates were lower and an average rental reversion of negative 24% was recorded for FY21/22.
  • Looking ahead1, rents for Beijing office districts, such as Lufthansa, which are nearer to the CBD, are expected to remain stable in the near-term. Based on market views, rents are likely to rise in late 2022 or early 2023.
  • In line with Beijing’s opening up of the services industry, tenants from these business services segments, in addition to the technology, media and telecommunications, as well as financial services and media sectors, are expected to form the bulk of leasing demand at Lufthansa and benefit Gateway Plaza1. In the second half of FY21/22, Gateway Plaza has also attracted new tenants from the environmental consulting and waste recycling sectors.
  • Occupancy rate at Gateway Plaza is expected to remain high, with active marketing and leasing of office space.

     The Pinnacle Gangnam

  • South Korea’s Grade A office market1 has shown strong growth in 2021 despite the uncertainty caused by COVID-19, and benefits from attractive market dynamics including built-in rental escalations. Vacancy rates decreased in all major districts, including the strong performing submarket of Gangnam Business District (“GBD”), supported by high-growth tech companies that are still performing well despite COVID-191.
  • The Pinnacle Gangnam is an office building located in GBD, Seoul. Consequently, The Pinnacle Gangnam has achieved a positive rental reversion of 44% in FY21/22, coupled with a high occupancy rate of 97.3% as at 31 March 2022.
  • For the Seoul office market2, with limited supply, on-going demand for office spaces due to the expansion of technology and pharmaceutical companies is expected to persist for the next few years. The Pinnacle Gangnam is in a good position to benefit from the strong leasing demand from these high-growth sectors, and to deliver organic growth through the high proportion of leases with built-in rental escalation during the lease term.

Notes:

  1. Source: Colliers International (Hong Kong) Limited, 30 March 2022 (link)
  2. Source: Colliers, Seoul Quarterly, 21 January 2022 (link)

Update on China, Japan and Korea Properties (FY21/22 Results: Presentation)
     

Is there any Plan B (if the Merger does not go through) for MNACT?

  • Should the Merger not go through, MNACT will return to business as usual, remaining focused on safeguarding the long-term value for unitholders through proactive asset management, effective cost control and prudent capital management. At the same time, we will continue to source for yield accretive acquisitions to achieve greater diversification and growth of MNACT. MNACT has demonstrated its capabilities in driving inorganic growth through acquisitions of high quality properties spanning across multiple North Asian markets; including expanding beyond its IPO geographies and successfully acquiring nine office properties in Greater Tokyo (2018, 2020 and 2021) and one office property in Seoul (2020).

MNACT will return to business as usual, remaining focused on safeguarding the long-term value for unitholders through proactive asset management, effective cost control and prudent capital management.

  • The Merger, on the other hand, will harness and combine the respective strengths of both REITs to create a more resilient and diversified platform. Over the years, we have been focused on growing and enhancing the resilience of MNACT’s portfolio through accretive acquisitions that provide both geographical and income diversification. The Merged Entity, MPACT, will have an even higher financial capability and flexibility to pursue value-creating acquisitions and fast-track its growth trajectory. We remain confident in the merits of the Merger and the exciting future ahead.
Enlarged Portfolio of post-merger Mapletree Pan Asia Commercial Trust
 

What are your priorities for the next 1-2 year post Merger? How do you split the work with Ms Sharon Lim?

  • As announced on 21 March 2022, it is intended that Ms. Lim Hwee Li Sharon who currently holds the positions of Chief Executive Officer and Executive Director in the MCT Manager, will retain these positions in the manager of the Merged Entity following the completion of the Merger. On or about the completion of the Merger, it is intended that the MNACT Manager will retire as the manager of MNACT and the MCT Manager will be appointed as the manager of the Merged Entity.
  • Following the Merger, the MCT Manager intends to implement its proactive and tailored “4R” asset and capital management strategy to realise the benefits from the Merger. For more details on the “4R” asset and capital management strategy, you may refer to Paragraph 4.2 in Appendix B – Offeror’s Letter to MNACT Unitholders of the Scheme Document (link).
“4R” Asset and Capital Management Strategy

Part 1 (Interview with MCT CEO, Ms Sharon Lim) can be read here.

 
Kenny Loh is an Associate Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement
 
You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement
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