Manulife US REIT - Annual Report 2021

MANULIFE US REIT 12 performance was impacted. In FY2021, MUST reported a 4.7% drop in gross revenue to US$185.1 million, while net property income declined 5.4% year-on-year (YoY) to US$109.5 million. Distributable income fell 3.8%YoY to US$85.6 million. As a result, MUST declared a FY2021 DPU of 5.33 US cents, 5.5% lower YoY. The decline was mainly due to lower rental income arising from higher vacancies, higher rent abatements for retail and food and beverage (F&B) tenants and lower car park income. However, as 2021progressed, therewas brighter news. For the full year 2021, 654,000 sq ft of leasingwas executedwhich represented 12.0% of our portfolio by NLA. Leasing demand came mostly from the Finance & Insurance and Public Administration sectors. Thanks to proactive forward renewals secured in 2021, only 8.0% of leases by NLA are due to expire in 2022, compared to 18.1% as at 31 December 2020. MUST’s subleasing remained low at 2.4%, down 27.0%YoY as most tenants maintained their real estate space. As at 31 December 2021, MUST’s WALE stood at 5.1 years. Rental reversions were still muted at -0.8% for the full year, although reversions would have been +3.3% after stripping out Michelsonwhich had some ‘over-rented’ leases that were above the average market rents. At 92.3%, MUST’s occupancy as at year end 2021 remained at a high level as compared to the U.S. Class A average of 83.2% 1 . Net effective rents in our portfolio have increased by 3.4% in 2H2021 compared to 1H2021, consistent with the recovery witnessed in the broader U.S. office market as tenant improvement allowances (TIs) and free rent eased. We have closely monitored the physical occupancy of our buildings over the past year, using this as a bellwether for increasing car park income and the health of the F&B tenants. Up until the Omicron outbreak in 4Q2021, we had experienced a steady increase in physical occupancy, but this fell sharply over the year end. In the first few months of 2022, we have started to see the numbers rising again, a good sign that the return-to-office is gathering momentum. One further piece of good news for the portfolio is that valuations in 2H2021 turned positive for the first time since the onset of COVID-19 and we will be working to better that over 2022. Q: How did MUST strengthen its capital management in 2021? CEO: In 2021, MUST’s balance sheet remained strong and we took advantage of the low interest rate environment, reducing the portfolio’s weighted average interest rate to 2.82% as at 31 December 2021, versus 3.18% as at 31 December 2020. In line with our proactive capital management strategy, we engaged in several initiatives that created additional financial flexibility for the REIT. Of note, we obtained our maiden sustainability-linked loan - a five-year US$250.0 million unsecured loan for refinancing existing loan facilities connected to our green buildings and for other purposes. In December 2021, we refinanced an acquisition bridge loan with a second sustainability-linked loan. Our sustainability-linked loans could provide potential savings if certain targets such as GHG, water and energy intensities are met. By January 2022, we had increased our green and sustainability-linked loans to 45.1% of total debt, generating a strong contribution to MUST’s ESG credentials. In FY2021, we reduced our percentage of fixed rate loans from94.5%as at 31 December 2020, to 86.5% as at 31 December 2021. This will create greater flexibility for portfolio rejuvenation and capital recycling. Although we anticipate that there will be U.S. interest rate hikes in 2022 to cool the economy, we believe that they will have a minimal impact on MUST’s total debt, as only 13.5% of debt is exposed to interest rate fluctuations. This means that a 1.0% increase in the interest rate will impact MUST’s DPU by 0.075 US cent. Around 96.0%of our current leases have either annual ormid-term/periodic escalations. Overall in-place rental escalations average 2.1% per annum. These escalations will provide a buffer Message to Unitholders 1 JLL 4Q2021 U.S. Office Outlook.