• No financials released in 3Q20 operational update. Slow quarter with no new leases signed. Portfolio occupancy dipped from 96.2% to 94.3% while portfolio subletting was unchanged at 3.3%.
• Gearing rose from 36.0% to 39.9% YoY due to a 2.9% decline in valuation in June 2020. Long WALE of 5.5 years maintained. Locked in +7.9% rental reversions YTD.
• Maintain BUY with higher DDM TP of US$0.92, raised from US$0.90 after incorporating lower cost of debt.

The Positives

+ Rental collections high at 94%, YTD 98%. Rent deferments and abatements were minimal at 0.3% and 0.2% YTD. Slow collections were mainly from F&B, lifestyle and retail tenants.

+ US$3mn interest savings expected from refinancing. About US$223.7mn or 26% in borrowings, at a 3.2% interest, will be up for renewal in FY21. Refinancing earlier in the year was done at 1.85%. We are expecting US$3mn p.a. in interest savings upon refinancing in FY21.

The Negative

– Decline in portfolio occupancy from 96.2% to 94.3%. This was largely due to known expiries unrelated to COVID-19, at Peachtree and Centrepointe. The tenant at Peachtree was a real-estate firm bought out by another real-estate firm. That at Centrepointe was a healthcare firm that changed its business model.

Outlook

Softer leasing expected, near term. According to JLL, the U.S. market lost 28.9mn sqft in occupancy in 3Q20, although rentals grew 0.4%. While MUST did not sign any leases in 3Q20, portfolio subletting was unchanged at 3.3%. Most leases have provisions that allow tenants to sublease, with MUST having the final approval on the type and quality of sublease tenants. Its original tenants will still be liable for the initial stipulated rents but will share upside should the sublease rents exceed the initial contracted rents.

Tenant incentives and free-rent expectations have increased. Tenants have also been renewing on shorter leases of 5-7 years instead of 10. Nonetheless, lease expiries in FY20/21 are low at 1.9% and 6.7% of GRI respectively, owing to MUST’s long WALE of 5.5 years. Below-market in-place rents at Capitol and Figueroa, in addition to an absence of new supply in these markets, should help support rents when leases expire.

Tenants exhibiting growing desire to return to office. This was seen in an uptick in physical occupancy, which increased to 13.5% in October 2020, up from 5% in March and 12% in June.

Maintain BUY with higher TP of US$0.92, up from US$0.90

Our DDM TP rises to US$0.92 from US$0.90 after incorporating lower cost of debt.