Manulife US Reit posts 91.7% occupancy in Q1; expects positive rental reversion

US office-focused Manulife US Real Estate Investment Trust (Manulife US Reit) on Monday (May 9) said that portfolio occupancy for the first quarter ended Mar 31 dipped to 91.7 per cent, down 0.6 percentage point from 92.3 per cent as at end-2021.

The manager noted that occupancy remained above the US Class A average of 83 per cent.

At a briefing accompanying the operational update, the Reit manager said the decline in occupancy was largely due to 2 tenants at its Peachtree and 10 Exchange Place properties that vacated over 20,000 square feet (sq ft).

This was partially mitigated by improvement in occupancy at the Reit’s Michelson property, which increased to around 90 per cent as at end-March, from about 80 per cent in June last year.

The Reit executed leases of about 68,000 sq ft in Q1, with 3.9 per cent rental reversion. More than half, or 54 per cent of total leases, were new, while the remaining 46 per cent were renewed leases. Sectors leasing its properties include accounting, real estate and finance and insurance companies.

“We only did 68,000 sq ft of leasing – which is less than where we want to be – and occupancy declined, but we are tentatively cautiously optimistic about the tailwinds of new leasing that we're hoping for the rest of the year that will get us back to the levels of occupancy that we want to be at,” said chief investment officer of the Reit manager Patrick Browne.

About 6.4 per cent of leases by gross rental income will expire in 2022. A majority of leases (49.4 per cent) by gross rental income will expire in 2027 and beyond.

With a long -weighted average lease expiry of 5 years, the Reit manager said it expects to continue to see positive rental reversion.

“The fourth quarter of 2021 was the first quarter since Covid that there was positive net leasing absorption in the US market. In the first quarter of 2022, leasing volume was 13 per cent above the fourth quarter of 2021. So there's continued positive momentum in the first quarter,” Browne said.

Physical building occupancy, though, remains a concern for the Reit.

Physical building occupancy fell to 25.3 per cent in Q1 2022, down from 29 per cent in Q4 2021. However, the Reit manager noted that physical occupancy reached 34 per cent in April.

“That's well below where we want to be and where we thought we would be, to be frank,” Browne said. “Covid isn't really a thing in the US anymore. It is for office users, I guess. But for restaurants and aeroplanes and everything else, it’s not a thing.”

“When you're looking at the return to office, there are a lot of personal reasons that Americans are slow to return,” said Manulife US Reit manager’s new chief executive officer William David Gantt III, also known as Tripp.

“I think it's a combination of comfort and cost preventing a lot of people from going back to the office,” Gantt said. “Simply put, after 2 years of working from home, a lot of this can seem pretty unappealing to a lot of Americans.”

“Employers are also watching very carefully and seeing how it all plays out. As they make decisions about leasing, they're looking very carefully at how many people are going to be physically present in the office and how often. And so this is a chart that we're really going to watch continually and continue tracking very, very closely,” he added.

However, Gantt notes that one upside to the headwinds such as the slow pace of occupancy and inflationary pressures on cost and expenses is the lack of new office supply coming up in the Reit’s markets.

“In the few places where we do see new supply, we don't anticipate that it's going to directly compete with our properties,” Gantt said. “But the higher rates of these newer properties could actually bode well for what we might be able to achieve in the coming years through renewals and new leasing.”

As the new CEO of the Reit manager, Gantt said he will focus on “increasing our occupancy, increasing our income, and increasing our valuations”.

As at Mar 31, the Reit’s gearing stood at 42.8 per cent, giving it a debt headroom of about US$326 million up to the regulatory limit of 50 per cent.

Meanwhile, its weighted average debt maturity stood at 2.6 years and weighted average interest rate was at 2.86 per cent. The manager noted that every 1 per cent increase in interest rate will impact the Reit’s distribution per unit by US$0.00075.

Units of Manulife US Reit closed 2.4 per cent or US$0.015 lower at US$0.60 on Monday, following the announcement.