RHB Bank Singapore analyst Vijay Natarajan has lowered his target price on Manulife US REIT (MUST) BTOU to 40 US cents (53 cents) from 43 US cents previously after the REIT sold its smallest asset, Tanasbourne, to its sponsor.
The divestment price of US$33.5 million is at a slight premium to its latest valuation price but on par with its valuation price as at end-December 2022. The price is also close to the REIT’s purchase price of US$33.85 million in November 2021. Tanasbourne accounts for 2% of MUST’s total portfolio value and net property income (NPI), notes the analyst.
While the analyst retained his “buy” call on the REIT, he notes that the sale, though positive, does not fully solve its issues about its high gearing and need for capital injection.
In his view, Tanasbourne, which is located in Hillsboro, Oregon, is not “the ideal choice”, but the asset is one that fits the time constraints.
He adds that Tanasbourne is among the REIT’s best-performing assets, has full occupancy and was only purchased recently. Furthermore, the REIT’s manager noted that the asset was “narrowed on” after factoring in the need for speedier execution since any interested party sale of 5% above net tangible assets (NTA) would require approval from its unitholders in an extraordinary general meeting (EGM). MUST’s NTA was around US$50 million.
The entire process could take around three to six months, in which market conditions could drastically change in the interim, says Natarajan.
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“While it explored a joint venture (JV) and stake sale on other assets it was met with complex tax implications for the REIT structure, thereby limiting such options,” he writes.
At the same time, MUST provided an update pertaining to its discussions with Mirae Asset Global Investments, where the board decided that Mirae’s proposal offers the best value in terms of its strong financial muscle, US real estate presence and track record.
Mirae is likely to subscribe for over 9.8% in new unit issuance as part of the transaction while MUST’s sponsor, Manulife, will hold on to its 9.1% stake in the REIT.
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To Natarajan, a key concern on the market has been the potential placement price and the dilution effect from the transaction. At present, MUST is trading well below its net asset value (NAV) of 55 US cents, he points out.
To this end, the analyst says he acknowledges and shares “similar concerns”, but will “await for the final deal proposal to evaluate the merits of such a transaction”.
He has also lowered his environmental, social and governance (ESG) score to 3.2 out of a total of 4.0. The score, which was down from 3.3, was due to RHB’s lowered governance score amid the lack of clear communication of challenges faced in some of its assets and delayed support from its sponsor.
Natarajan has lowered his distribution per unit (DPU) estimates for FY2023 to FY2025 by 4% to 5% after factoring in the latest sale of Tanasbourne. He has also reduced his margin assumptions following expectations of higher tenant incentives.
As at 4.21pm, units in MUST are trading flat at 18.4 cents.
