• Maintain TRADING BUY and TP of USD0.12, 72% upside. Manulife US REIT’s operational performance (1H) was in line, with a glimmer of a sign that market conditions are stabilising. US office leasing volumes are starting to point to a pick-up, with some normalisation in return-to-office trends. Key catalysts remain the execution of its right dispositions, and preserving the long-term value of remaining assets – which the new management team seems to be positively working towards.

• Disposition plan on track, with three assets on the market. It has not shared the names of these assets due to the sensitive nature of the transactions, but has kept its target of USD100m in asset divestments by the year-end. A key consideration for disposition will be the need for incremental capital to be spent on the asset vs potential returns. MUST is willing to selling assets at a discounted price if necessary. There has been a noticeable increase in purchasers’ interest for its assets, from both institutional and high net worth investors. Financing conditions are starting to ease slightly, with an uptick in office market investment activity seen during the last quarter.

• Portfolio occupancy rate remained stable QoQ at 78.4% (1Q:78.7%). About 76% of the ~428k sqf in leases signed in 1H came from renewals with Amazon – MUST’s fifth largest tenant (3.4% of income) – extending its lease by 3+ years. Demand came from the tech, retail, finance and healthcare sectors. Rent reversion for the leases was at -10.6% - we believe this was dragged down by the Amazon lease extension. The REIT’s leasing pipeline remains healthy, at 1.4m sqf (~80% of this are at the proposals stage). Management expects the easing of the labour market to result in a higher return-to-office rate, which should boost its leasing momentum.

• 1H24 same store revenue growth was down 8.1% YoY, due mainly to: i) The exit of a key tenant, TCW, at the start of the year, and ii) downsizing at The Children’s Place. NPI margins, however, came in below expectations on higher leasing commissions and higher insurance premiums. Around 80% of MUST’s debt is hedged, and its new policy is to keep 50-80% of debt hedged on the expectation of interest rate cuts. Aggregate leverage stands at 56.3% (1Q: 56.7%), with an interest cover of 2.2x.

• No significant changes to portfolio value for 1H based on management’s review of valuation assumptions done at Dec 2023.

• Our TP is pegged to 0.35x FY24F BV. We cut NPI margin assumptions for FY24 and 25F on back of higher opex and tenant incentives resulting in 12% and 11% lower available distributable income, and expect no distribution payments until FY26. Our TP has a 0% ESG premium/discount imputed, as MUST’s ESG score is in line with the country median.

Source: RHB Research - 6 Aug 2024