Manulife US Reit manager eyes ‘hotelisation’ of office assets amid dour outlook

THE manager of  Manulife US Real Estate Investment Trust (Manulife US Reit) is coming to terms with the fact that workers in the US are simply not returning to the office as expected.

As at Jul 11, physical occupancy across Manulife US Reit’s office assets stood at 28 per cent. While an improvement from physical occupancy of 25.3 per cent in the first quarter, it is a far cry from earlier expectations.

“There are a couple of trends that have become really clear to us,” Tripp Gantt, chief executive officer of the manager of Manulife US Reit, said at a briefing following the release of the Reit’s financial results for the first half ended June.

“We are seeing a once-in-a-generation upheaval in how workers in the US use the office. Americans’ preference for a hybrid mode of work is becoming clear and we believe it is likely to be the new normal,” he added. “What this means for us, specifically, is that there are going to be fewer people in your office building on any given day compared to where you were pre-pandemic.”

As hybrid working arrangements rose in popularity and employers assessed their space needs for the future, this has resulted in a general leasing slowdown, he said.

While rental reversion edged up 1 per cent in the first half, Manulife US Reit’s portfolio occupancy slipped to 90 per cent as at end June, from 91.7 per cent at end March.

The Reit is also seeing some significant tenant movements amid the changing office trends.

TCW Group, a finance and insurance tenant at the Figueroa office building in Los Angeles, has decided to vacate its space when it expires in December 2023.

The group is Manulife US Reit’s second largest tenant, accounting for 3.8 per cent of gross rental income (GRI), and the largest tenant at Figueroa.

The Reit manager said this gives some potential for rental reversion growth as TCW’s expiring rents are about 9 per cent below current market rents.

Meanwhile, the second largest tenant at Figueroa, law firm Quinn Emanuel Trial Lawyers, is cutting its space by more than half.

Quinn Emanuel is downsizing by 71,000 square feet (sq ft) effective end August, and has renewed the remaining 64,000 sq ft for another 5.4 years starting September at a positive rental reversion of 2.5 per cent.

Post downsizing, Quinn Emanuel will account for 1.4 per cent of Manulife US Reit’s GRI, from 2.9 per cent currently.

Moving forward, Gantt identified 2 strategies to boost its property business – first by upgrading its assets into “premium amenities in great locations”, with the idea arising from a trend he coins as the “hotelisation of office”.

The Reit will also look to partner the “best-in-class operators” to offer more flexible workspace in its buildings, which will allow existing and prospective tenants to expand and contract as needed.

For example, the Reit manager said it is exploring hotelisation possibilities at its Michelson building in Irvine. Some ideas include turning the rooftop into a space to be leased to F&B, converting the low floors into amenities such as gyms and lounges, and introducing outdoor chill out areas.

“You have these flexible spaces, you have experiential offerings, you have gyms, you have all these different things that people can use. It feels more like a hotel when you go in there. People want to come in: It's a fun place to work; it's a more comfortable place to work. And those are the buildings that we're seeing are getting the best success right now,” Gantt said.

He added that another building in that market that has embarked on the hotelisation concept is seeing rents up to US$60 per square foot (psf) – significantly higher than the current rents of around US$48 psf at Michelson.

“Formulating the optimal mix of traditional, flex and turnkey space will enable us to stay ahead of the curve amidst the uncertain leasing environment,” said Gantt.

For the half year ended Jun 30, Manulife US Reit reported a 3.3 per cent drop in its distribution per unit (DPU) to US$0.0261, from US$0.027 last year.

The decline was due to lower income from existing properties, after factoring in the enlarged unit base from a private placement last year.

Distributable income was 6.9 per cent higher than the year-ago period at US$46 million.

Gross revenue grew 10.6 per cent to US$100.4 million in H1, from US$90.8 million a year ago.

This was mainly due to contributions from 3 properties – Tanasbourne, Park Place and Diablo, acquired in December 2021, higher car park income and lower rent abatements provided to tenants affected by Covid-19, partly offset by lower rental income from existing properties as a result of higher vacancies.

Net property income for the first half of the year also gained 2.8 per cent to US$57.6 million from US$56.1 million previously.

The distribution will be paid out on Sep 27, after books closure on Aug 15.

As at Jun 30, the Reit’s gearing stood at 42.4 per cent, slightly below the 42.8 per cent it reported in H2 last year.

The Reit had also obtained a new US$225 million unsecured sustainability-linked loan in July 2022, mainly to refinance revolving credit facilities and the mortgage loan facilities for Plaza and Exchange – which are Class A office buildings in New Jersey. Post-refinancing, no refinancing is required for FY2022, it added.

The Reit’s manager said its portfolio remains “well positioned to weather any further market uncertainty from a slowing economy”.

Portfolio weighted average lease expiry (WALE) stood at 5 years, with only 4.8 per cent of leases by net lettable area (NLA) due to expire over the remainder of the year and 10.2 per cent in 2023.

Units of Manulife US Reit are trading 0.8 per cent or US$0.005 lower at US$0.59 as at 4.30pm on Aug 4, following the results announcement.