Analysts have slashed their target prices on Manulife US REIT (MUST) following the release of the REIT’s 3QFY2022 ended September results on Nov 2.
Among them, DBS Group Research analysts issued the steepest cut, bringing MUST's target price down from 70 US cents (99 cents) to 48 US cents, while maintaining "buy" on the REIT.
"Return to office to drive recovery, albeit unevenly. We believe the return to office and economic recovery in the US will drive recovery in the office market, though it could be uneven," write the analysts in a Nov 3 note.
MUST is now trading below pandemic trough in March 2020. "At this level, downside risks could be limited," they add.
That said, MUST is now on a better playing field post inclusion in the FTSE EPRA Nareit Developed Asia Index, where it will likely herald a virtuous cycle of greater investor visibility, says DBS. "Following this, we have already seen higher trading liquidity and yield compression for MUST. We believe the new leadership will lead MUST into recovery and growth."
RHB Group Research analyst Vijay Natarajan, too, brought his target price down from 78 US cents to 64 US cents while maintaining “buy” on the REIT.
“[MUST’s] 3QFY2022 operational updates show that key gateway office assets are slowly stabilising, with a bottom likely by year’s end. Management expects occupancy to stabilise at current levels, with rent reversions to stay positive. While there are challenges in gateway cities offices — on the back of transition to a hybrid working model — it has been priced in, with Manulife US REIT trading at a distressed valuation of 0.5x P/BV and approximately 15% yields,” writes Natarajan in a Nov 2 note.
MUST’s portfolio occupancy slipped further to 88.1% as of Oct 18, extending a decline from 90.0% as at end-June and 91.7% as at end-March.
Portfolio weighted average lease export (WALE) dipped slightly q-o-q to 4.9 years from 5.0 years. That said, MUST executed some 61,000 sq ft of leases in the quarter — 56.8% of them new leases — adding to a year-to-date total of 254,000 sq ft, or some 4.7% of portfolio net lettable area (NLA).
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Notably, divestment is on the cards for MUST to address gearing and interest cover (ICR) concerns. Natarajan writes: “Gearing is on the high side at 42.5% and likely to further rise by year’s end with a probable cap rate expansion. ICR currently stands at 3.4x, above the 2.5x requirement for 45% gearing, but is likely to trend lower with rising interest costs.”
MUST has US$105 million, or some 10% of loans maturing in 2023, for which it is in talks, with interest cost for this tranche likely at 100bps to 150bps higher than the current 3.34% per annum (p.a.) all-in interest cost. Some 81% of its loans are currently fixed, with every 100bps rise bringing distribution per unit (DPU) down by about 2%.
Meanwhile, CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong are maintaining “add” on MUST but with a similarly steep cut in target price, from 78 US cents to 69 US cents.
“We lower our FY2022-2024 DPU estimates by 2.1%-3.49% to factor in a higher debt cost. Our forecast of 14.2% FY2022F dividend yield prices in much of the slower near-term growth,” write Lock and Ong in a Nov 3 note.
UOB Kay Hian Research analysts Llelleythan Tan and Jonathan Koh note that MUST is ramping up its “hotelisation” efforts, a form of asset enhancement initiative announced by the REIT at its 2QFY2022 results.
The analysts maintain “buy” on MUST in a Nov 3 note, slashing their target price from 74 US cents to 63 US cents.
“MUST partnered with Flex by JLL to take up 15,407 sq ft, or some 3.3% of net lettable area (NLA) of office space in Plaza with an additional 20,451 sq ft (4.4% of NLA) in subsequent phases by 2023, providing enterprise-grade flexible space solutions at an expected stabilised rent premium of 30% to market.”
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The first phase is already underway and is expected to be operational by 2Q2023, with phase 2 and 3 operational by 2H2023 and 1H2024 respectively and at a total cost of US$6.8 million. As of end-3QFY2022, Plaza’s occupancy was 91.1%, and is expected to increase to around 95% once phase 3 is completed,” note Tan and Koh.
Additionally, Peachtree is next in line for hotelisation in 1H2023, at a total cost of US$18 million over two years, and is also expected to command rents that are 30% higher upon completion. This is in line with MUST’s strategy to ensure its properties remain competitive and command premium rents. Management has noted that they are potentially looking at other assets to undergo hotelisation, with Michelson the next likely target, write Tan and Koh.
As at 1.25pm, units in Manulife US REIT are trading 1 US cent lower, or 2.82% down, at 34.5 US cents.
