Manulife US REIT taking the 'right measures' after 10% fall in valuation: analysts

MUST reported FY2022 ended December results on Feb 9, with distribution per unit (DPU) of 2.14 US cents (2.835 cents) for the 2HFY2022 ended Dec 31, 2022, 18.6% lower than the DPU of 2.63 US cents reported in the 2HFY2021.

This comes after the REIT decided to retain US$3.8 million from its distributable income in the 2HFY2022 for general corporate and working capital purposes on the back of the “volatile macroeconomic environment” and decline in asset valuation.

2HFY2022 and full-year DPU came in slightly below estimates, says Natarajan. “Positives were seen on the leasing front, with new leases (4QFY2022) accounting for 67% of total demand. More importantly, we believe management is taking the right steps by actively working with its sponsor to lighten its debt while simultaneously exploring options with third parties, which, if successful, should bring the much needed relief and stabilise the REIT.”

On Dec 30, 2022, MUST reported that its portfolio value fell by 10.9% y-o-y to US$1.95 billion. As at Dec 31, 2022, MUST’s gearing ratio rose by 6.0 percentage points y-o-y to 48.8%,

See also: Manulife US REIT reports 18.6% lower 2HFY2022 DPU of 2.14 US cents after capital retention

In a Feb 10 note, Natarajan maintains “buy” on MUST with an unchanged target price of 43 US cents.

MUST’s unit price valuation has priced in the worst, says Natarajan, and it is currently trading at 40% discount and offering 14% yield.

Road to redemption

See also: Manulife US REIT begins 'hotelisation', considers diversifying into other asset classes

MUST is currently working on various steps to address its high gearing and operational challenges, says Natarajan.

Management is in active negotiations with its sponsor for potential asset disposition, likely to be in the form of a stake sale of its assets, he adds. “Any such sale to the sponsor will be at or above the latest valuation, as per guidelines. In addition, its ongoing strategic review has received a broad range of interest from local and international developers as well as private equity firms. These are likely to be evaluated by 2QFY2023.”

In the meantime, the REIT has cut its payout ratio and is activating a distribution reinvestment plan to conserve cash. While another option to shore up capital is through a highly dilutive rights issue, this is likely to be one of its least preferred options, says Natarajan.

CGS-CIMB cuts TP

Meanwhile, CGS-CIMB analysts Lock Mun Yee and Natalie Ong maintain their “add” call on MUST but with a lower target price of 55 US cents from 69 US cents previously.

MUST has formed a strategic working group and appointed Citigroup as financial adviser. To date, management indicated it has received healthy interest from counterparties including local and international developers, REITs and private equity groups.

Citigroup is expected to present proposals to the working group by end-March and the working group will evaluate proposals with Citigroup in 2Q2023.

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Lock and Ong have a dividend yield forecast of 15.1% for FY2023. “We lower our FY2023-2024F DPU estimates by 11.8%-17.1% to factor in a higher debt cost and a lower payout ratio of 96%.”

While the high projected FY2023 dividend yield reflects that much of the operational challenges have been priced in, Lock and Ong believe the pending outcome of the strategic review remains a near-term overhang.

Portfolio occupancy stood at 88% at end-FY2022. MUST signed 378,000 sq ft of leases in FY2022, at an average 0.7% positive rental reversion.

About 48% of leases signed were new demand, coming from legal, architecture and engineering and finance and insurance sectors.

Management guided for positive low- to mid-single digit reversions for FY2023. MUST has 10.8% of leases expiring in FY2023. According to property consultant Jones Lang Lasalle (JLL), the US office leasing market remains mixed with sluggish leasing volumes, although net effective rents have been recovering, on the back of tenants’ flight to quality.

Potential re-rating catalysts include a quicker conclusion to the strategic review and swifter recovery of the US office transactions market, write the CGS-CIMB analysts. “Key downside risks include slower-than-expected backfilling of vacated spaces that could impact near-term income visibility and protracted slowdown in the US economy, which could dampen appetite for office space.”

DBS also lowers TP, says headwinds ‘largely priced in’

DBS Group Research analysts Rachel Tan and Derek Tan have kept their “buy” call on MUST with a lower target price of 45 US cents, down from their previous target price of 48 US cents.

To the analysts, they see the headwinds as largely priced in based on MUST’s unit price levels. Furthermore, they believe that the markets have priced in the REIT having a rights issue at its current price.

“Given our worst case (potential rights issue), MUST’s current share price could still offer an [estimated] 8% yield, above its historical mean. We believe that the headwinds are largely priced in and the share price is close to the bottom,” the analysts write.

The way they see it, any potential resolution on their current situation, including their high gearing, will lift the overhang on MUST’s unit price and closer to their target price.

“Our total upside (including dividend) of 64% mainly considers 14% from dividends, 1.8% from terminal growth, and a valuation rerating of 48% in anticipation of the potential upliftment of the current overhang,” say the analysts.

Key risks include a slower-than-expected economic recovery and potential recession in the US as well as a non-renewal in leases.

“MUST’s financials, operations, and capital growth may be adversely affected by bankruptcy, insolvency, or downturns in the businesses of its tenants, which may lead to the non-renewal of their leases,” they add.

As at 3.21pm, units in MUST are trading flat at 33 US cents.