INTERVIEW: Manulife US REIT Well-Positioned With ESG Leap, Post-Covid Trends (Magazine)
June 21, 2021- The Covid-19 pandemic has heightened the awareness of ESG and has, in part, spurred the integration of ESG criteria into asset management. This shift is accelerating, and REITs that do not integrate ESG into their portfolios risk losing out as investors increasingly demand it.
In Singapore, many REITs are starting to look at sustainability, in part spurred by regulations. Manulife US Real Estate Investment Trust (Manulife US REIT), with nine office properties in the US, is among those that have a comprehensive ESG strategy. The REIT was listed in Singapore on May 20, 2016, and as at December 31, 2020, its portfolio has an aggregate net lettable area of 4.7 million sq ft. Its nine freehold and Trophy or Class A quality office properties are located in in key areas in California, Georgia, New Jersey, and the Washington D.C. MSA.
We spoke to Jill Smith, the CEO of Manulife US Real Estate Management Pte. Ltd., the manager of Manulife US REIT (MUST), on the REIT’s ESG and investment strategy as well as her views on the recovery in the US and President Biden’s budget and tax proposals.
Questions:
1. MUST is an ESG leader among REITs, having achieved 5 stars in the GRESB Real Estate Assessment and inclusion in numerous ESG indices. What is the philosophy you adopt in approaching ESG?
We build our belief in responsible investing based on the principle that, “A life is worth living through giving”. As such, we strive to integrate the best ESG practices into our operations, and we work closely with our Sustainability Steering Committee (SSC) to drive internal and external sustainability efforts.
We are committed to sustainable investing through four key tenets: sustainable properties, external relations, human capital, and ethical corporate behaviour.
2. How do you approach each of environment, social and governance?
Overall, our sustainability strategy and programmes are aligned to our Sponsor’s. We also work closely with our Property Manager, John Hancock Life Insurance Company, to improve the sustainability performance of our properties. In 2017, our Property Manager launched an internal Sustainable Building Standards outlining 13 sustainability focus areas to enable benchmarking and target setting for all of MUST’s nine properties. At the same time, MUST’s SSC drives sustainability strategies, sets targets, oversees monitoring processes, and reviews sustainability performance for the REIT.
On the environmental front, our efforts are focused on sustainable properties. We aim to create value for tenants and unitholders by reducing the environmental impact of our properties. This includes launching initiatives to maximise resource efficiency at our properties and working with our tenants to minimise their environmental footprint wherever possible. Beyond the existing portfolio, environmental due diligence is also a fundamental component of Manulife Real Estate’s acquisition due diligence when it seeks to buy new properties.
We have made significant progress in reducing the environmental impact of our properties over the years. Eight of our nine properties have met rigorous standards established by the U.S. Environmental Protection Agency and were ranked among the top 25th percentile of similar properties for energy efficiency. Currently, 86.5% of MUST’s portfolio by Gross Floor Area (GFA) is green building certified by either Leadership in Energy and Environmental Design (LEEDTM), ENERGY STAR® or both. In 2020, MUST recorded energy, water and GHG intensity reductions of 23.2%, 36.6%, and 30.7% respectively.
Our properties are also included in our Sponsor’s GHG reduction target of 80% by 2050. This year, we are working with our Asset Manager to develop a model to identify GHG reduction opportunities specifically for MUST’s buildings and we will initiate GHG reduction targets for the portfolio from 2022.
We also execute our social governance through two strategic areas: external relations and human capital. For external relations, we aim to understand and help meet the needs of the communities we engage with, namely the tenant, investment, and local communities.
We’ve always prioritised tenants’ health and safety, but the COVID-19 outbreak has further stressed the importance of it. To better understand their evolving needs and concerns, we maintain regular conversations with tenants. In our recent tenant satisfaction survey conducted in 2020, an overwhelming 88.0% of tenants responded with a 4- or 5-star rating for overall satisfaction. When it comes to the investment community, we seek to enrich their understanding on the real estate sector and its related themes. This includes our ongoing Green Dot Series where we provide informative conferences, seminars, and thought leadership pieces to the investment community. As for the local community, we lend the strength of our team to engage in community service and donation drives, as well as integrate the practice of procuring goods and services from local social enterprises across all possible business functions. Our CSR programmes in 2020 focused on engaging the elderly, supporting social enterprises and helping communities affected by the pandemic.
On the governance front, our focus is to ensure continued adherence to regulations through the highest standards of governance and best practices by employing stringent corporate compliance and internal audit practices. As a sign of the Board’s commitment to upholding high corporate governance standards, MUST retained its SGX Fast Track status for the third year running in 2020.
In 2020, MUST was ranked 4th by the Governance Index for Trusts (GIFT) and 9th by the Singapore Governance Transparency Index (SGTI) amongst 45 real estate investment trusts and business trusts listed on the Singapore Exchange. In addition to receiving accolades in corporate governance, MUST’s sustainability efforts are well-recognised by major ESG benchmarks with a 5-star rating by the Global Real Estate Sustainability (GRESB) Real Estate Assessment, a 4th placing out of 15 listed U.S. office REITs, as well as an ‘A’ in GRESB Public Disclosure. It also ranks 1st out of 10 Asia offices and ‘A’ in MSCI ESG Ratings.
3. MUST received your maiden Green Loan for Peachtree’s Refinancing in May 2020. How was the Green Loan structured – ‘Green benchmark’, loan terms, etc.?
The green loan was raised under a newly established green finance framework, which was prepared in line with the relevant international principles and guidelines. The US$100 million green loan was primarily used to refinance an existing loan for Peachtree, an ENERGY STAR® certified building located in Atlanta, as well as environmental initiatives at other green properties within our portfolio (LEED™ and/or ENERGY STAR®).
4. What was the relative market pricing of Green Loans when you received it and in today’s context? Are there tangible economic dividends to Green Loans?
Currently in the marketplace, there are three types of loans – a) conventional loan, b) green loan, c) sustainability-linked loan.
There is no pricing differential between a conventional loan and green loan. The green loan proceeds must be used for green buildings only.
On the other hand, for a sustainability-linked loan, there is interest rate reduction upon achieving certain green targets.
5. Do you plan to issue more Green Loans and how will these be structured?
We take a proactive capital management approach to optimise our capital structure and increase financial flexibility. On top of the green loan, we have successfully obtained a US$250 million sustainability-linked loan in March this year for our 2021 refinancing, with further interest savings expected. It incorporates interest rate reductions linked to pre-determined sustainability performance targets, such as efficient use of energy and water, and management of GHG emissions, which is a further testament to our commitment to sustainable investing.
We will endeavour to obtain green or sustainability linked loans in the future, where feasible.
6. It has been a tumultuous couple of years, inclusive of the impact of COVID and the handing over of the US presidency to Biden. How has COVID impacted US office occupancy? To what extent is there a structural shift to co-working/ working from home?
Given social distancing measures, physical occupancy in US offices was naturally impacted. Our portfolio’s committed occupancy stands strong at 92.0% as at March 31, 2021, while our physical occupancy has inched upward incrementally from 13% at the start of the year to 20% in end-May. With California’s lockdown ending 15 June 2021, we expect to see occupancies pick up at our three assets there, namely Figueroa, Michelson and Capitol.
There remains a strong structural demand for offices. In the last quarter, virtual office tour activity by tenants had improved across all locations. Given the strong focus on the knowledge economy in the US, office-using industries have been predicted to take a disproportionate share of future job gains, according to Moody’s. PwC’s U.S. Remote Work Survey 2021 showed that 70% of tenants require the same or more office space post COVID-19, due to rising headcount and social distancing needs.
Additionally, employers are beginning to embrace a hybrid work model, with a heavier weightage to working from office.
Moreover, while working from home is a relatively new concept in Singapore, flexible working, which includes working from home, has been a norm for over a decade in the US. Within the wider Manulife group, 30% of employees already had an option to work from home pre-COVID-19. Looking ahead, JLL predicts that the historic 8% to 10% of the office workforce that works principally from home could perhaps double, but the majority of the white-collar workforce will continue to use the office in the US.
7. .Vaccination rates in the US are progressing quite nicely, albeit there are pockets of hold outs. How do you see the recovery from COVID – timeline, trajectory, magnitude, etc?
The upcoming 12 months should be an exciting period with recent economic numbers pointing towards a strong recovery. Economic activity has picked up, while job growth has also increased in May. Although there are some concerns around inflation, the recent momentum, along with the proposed budget plans should make way for healthy recovery.
That said, economic recoveries tend to be uneven, with some geographies and industries rebounding more quickly than others. Looking ahead, MUST is seeking transformational growth by riding on some post COVID-19 themes.
For instance, emerging markets in the Sun Belt region are capturing a disproportionate share of tenant demand and have more stable occupancy levels compared with the gateway cities such as New York and San Francisco. Amid the recovery, several themes that provide good opportunities in the commercial real estate sector in the US have also emerged. We are seeing strong growth in the tech sector, demand for healthcare, along with acceleration of population and company migration to key magnet cities.
MUST seeks to target key locations with strong fundamentals that ride on these themes and allow us to acquire yield-accretive properties or portfolios with cap rates ranging from 6.5% to 7.5%. On the tenant front, MUST aims to attain at least 20% in high growth sectors, up from the current 10%.
8. How will Biden’s tax and budget proposals impact MUST?
President Biden’s proposed budget calls for US$5.4 trillion in additional spending over 10 years. If this is successfully enacted, the expanded health insurance coverage could drive demand for medical spaces situated closer to consumers, which is one of the sectors MUST is looking to capture in its growth strategy. In addition, increased investments in infrastructure and R&D should benefit office and industrial real estate demand.
Additionally, President Biden has pledged to reduce US greenhouse gas emission (GHG) by at least 50% in 2030. MUST will work to implement actions to support any upcoming regulations. We have already set a GHG emissions target in response to the anticipation of upcoming emissions-related regulations and investor expectations, but we would welcome a federal approach to support consistent building performance standards.
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