- 1H20 NPI and DPU were in line, forming 49.2% and 47.0% of our FY20e NPI and DPU.
- Positive rental reversions of 7.9% for 1H20. MUST’s portfolio remained resilient – no increase in subletting within their assets, and no request from tenants to right-size/downsize or relocate thus far. Minimal rental abatement and deferments offered.
- We remain optimistic on MUST’s resilience due to its long WALE, low expiries in FY20/21, tenant quality and tight supply in the markets that MUST has a presence in.
- Maintain BUY with a higher TP of USS$0.90. Our higher TP is mainly due to the lower cost of equity – lowered from 10.0% to 9.1%.
The Positives
+ Positive rental reversions of +7.9% on 217,300 sqft (4.6% of NLA) for 1H20. Of the c.217,300 sqft of leases signed, 50% were renewals, 42% were new leases and 8% were expansions. Leases signed were from the financial, legal, real estate and tech sectors. MUST’s portfolio remained resilient – no increase in subletting within their assets, and no request from tenants to right-size/downsize or relocate thus far. MUST’s long WALE of 5.7 years translates to low lease expiries of 3.5%/6.1% by GRI for FY20/21. Modest, single-digit rental reversions are still attainable as rents expiring in FY20/21 are 2% to 19% under comparable market rents. Tenants are locked in by leases, which do not have break clauses written in. While asking rates have remained stable, softer leasing activity is expected in this weaker economic environment, which may lead to more tenant incentives being offered to retain/attract tenants.
+ Only 0.3% of rental waivers and 0.3% of deferment provided, based on 1H20’s GRI. Little rental support was required due to the quality/resilience of tenants – waivers and deferments were offered mainly to the F&B tenants. MUST’s portfolio is anchored by the Legal (22.0%) and Finance and Insurance (19.9%) sectors which have been one of the more resilient sectors throughout the COVID-19 pandemic. MUST’s Top 10 tenants (excluding Finance and Legal), account for 24.2% of GRI and are mostly listed companies, government entities and/or use the premise as headquarters.
The Negatives
– Deterioration of rent collection. We note that rent collection has been on the downtrend, deteriorating from 99% in April and 97% in May, to 93% in June. Management commented that rents are still being collected, although tenants are taking a longer time to make payment.
– Portfolio valuations fell 2.9%, pushing gearing up from 37.7% to 39.1%. Asset valuations deteriorated by -1.9 to -4.7%, averaging -2.9% on a portfolio level, largely due to lower rental growth assumptions used by valuers. As a mathematical consequence, gearing edged up to 39.1%.
Outlook
While leasing activity remains weak, we remain optimistic on MUST’s resilience due to its long WALE, low expiries in FY20/21, tenant quality and tight comparable supply in the markets that MUST has a presence in. Cautious business sentiment has led to the deferment of major leasing decisions (relocations) resulting in more renewals. We also expect the densification trend to pause due to social distancing measures, hence providing support for leasing demand. Additionally, statistics for office-using sectors show that these sectors (Finance and Insurance, Legal, Professional Services and Tech) remains the most resilient amongst the sectors.
Maintain BUY with a higher TP of US$0.90 (prev. US$0.80).
We lower our beta to reflect the relative resilience of US office asset class, owing to the resilience of office-using tenants and long WALEs. Our higher TP is mainly due a lower cost of equity assumption of 9.1% (prev. 10.0%).
Source: Phillip Capital Research - 5 Aug 2020
https://sgx.i3investor.com/servlets/ptres/14416.jsp
