Manulife US REIT (MUST) BTOU is continuing to navigate challenges in 1QFY2023 ended March, say CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong, amid high gearing and an ongoing strategic review.
MUST reported lower q-o-q portfolio occupancy of 86.1%, from 88% at end-FY2022, due to children’s apparel company Carter’s renewal and downsize of 69,000 sq ft of space at its Phipps property.
Physical occupancy at MUST’s buildings averaged some 30% as at end-1QFY2023. Portfolio weighted average lease expiry stood at five years as at end-1QFY2023. MUST’s gearing ticked up to 49.5% during the quarter while interest coverage ratio dipped to 2.9x. Average funding cost rose to 3.98% as at 1QFY2023.
A spokesperson for the Manager says the Manager stress-tests the portfolio to see how changes in income (as contributed by occupancy and rents) and interest expenses will affect the interest coverage ratio (ICR). Based on 1Q2023’s ICR of 2.9x, Ebitda will have to drop by around 13% or interest expense increase by around 15% for ICR to dip below 2.5x.
While MUST's gearing is above 45%, it is still below the regulatory ceiling of 50%. REITs whose gearing rises above 45% need to ensure that ICRs remain at or above 2.5x. MUST has not breached its financial covenants despite its heightened aggregate leverage.
Despite MUST's operational stresses, Lock and Ong maintain “add” on the REIT with an unchanged target price of 55 US cents (73.63 cents).
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The analysts forecast distribution per unit (DPU) of 4.5 US cents for 2023, 4.3 US cents for 2024 and 4.5 US cents for 2025. “We keep our 2023-2025 DPU estimates unchanged… While the high projected FY2023 dividend yield reflects that much of the operational challenges have been priced in, we believe the pending outcome of the strategic review remains a near-term overhang,” write Lock and Ong.
MUST signed 348,000 sq ft of leases in 1QFY2023, including Carter’s lease renewal and extension, a renewal at Michelson (at more than 30% rent reversion) and a new lease at Figueroa.
Carter’s, MUST’s top tenant accounting for 4.5% of 1QFY2023 gross rental income (GRI), renewed 209,000 sq ft of space at Phipps and extended its lease expiry from 2030 to 2035.
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According to the lease terms, MUST will enjoy a +18% rent reversion from 2025.
MUST also indicated that there has been healthy tenant interest for 10,000 to 20,000 sq ft of the 69,000 sq ft of space given up by Carter’s.
Overall, MUST enjoyed a +5% rent reversion in 1QFY2023.
MUST has a balance of 7.6% and 10.8% of leases expiring in 9MFY2023 and FY2024 respectively. According to property consultant Jones Lang Lasalle, leasing volumes in MUST’s submarkets continue to be weak; although lease terms are stable, concession packages remain elevated.
Strategic review
The REIT’s manager revealed on April 12 that discussions with its potential acquirer Mirae Asset Global Investments are still ongoing. On May 11, the manager says due diligence is “substantially completed” and the parties are currently negotiating key terms.
“MUST’s strategic review remains ongoing and management updated that due diligence by Mirae has been substantially completed and the parties are currently negotiating key terms,” note Lock.
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The target completion date of the review is maintained at 2QFY2023/3QFY2023. As part of its review, sponsor Manulife is to retain its 9.1% stake in the REIT. MUST also earlier announced that Mirae will subscribe for more than 9.8% of new units, subject to unitholders’ approval (in an ordinary resolution), to recapitalise MUST, reduce gearing and provide stability and growth. Access to Mirae’s US asset pipeline would also allow MUST to execute its pivot strategy.
To Lock and Ong, potential re-rating catalysts include a quicker conclusion to the strategic review and swifter recovery of the US office transactions market.
However, key downside risks include a slower-than-expected backfilling of vacated spaces that could impact near-term income visibility, and a protracted slowdown in the US economy, which could dampen appetite for office space.
As at 1.26pm, units in MUST are trading 0.4 US cents lower, or 2.82% down, at 13.8 US cents. Units in MUST reached an all-time low of 13.7 US cents earlier in the day.
