UOB Kay Hian analyst Jonathan Koh has re-initiated coverage on Manulife US REIT (MUST) with a “buy” call as he sees the negatives as largely priced in within the REIT’s unit price. He has also given the REIT a target price of 47 US cents (63.1 cents).
“MUST has endured a series of downsizing and non-renewals by key tenants with the latest setback being early termination by The Children’s Place at Plaza in Secaucus,” says Koh.
“We estimate that portfolio occupancy could deteriorate by 9 percentage points (ppt) to 79% by end-FY2024 if vacant spaces are not backfilled,” he adds.
In his view, the REIT’s low physical occupancy could cause more downsizing. MUST currently has the lowest physical occupancy of 30% among the US office REITs listed on the Singapore Exchange S68 (SGX) compared to its peers, Keppel Oak Pacific REIT (KORE) at 64% and Prime US REIT OXMU ’s 56%.
However, the analyst notes that the REIT is hampered by its large exposure to California and Washington DC which accounted for 36% and 8% of its portfolio valuation respectively.
MUST has also been deleveraging through divestments, to which Koh sees Phipps’ valuation dropping by US$48 million to US$162 million after factoring in the downsizing by William Carter with a cap rate expansion of 25 basis points (bps) to 6.1%.
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“Assuming capex of US$25 million per year, we expect the divestment of Phipps and Tanasbourne (valued at US$33.5 million and completed in April 2023) to lower Manulife US REIT’s (MUST) aggregate leverage by 4.3ppt to 45.2%,” he writes.
Further to his report, Koh is estimating that MUST’s investment properties to drop by 15%, or US$250 million, to US$1.48 billion as at end-FY2023 assuming the cap rate for MUST’s portfolio expands another 50bps to 6.3%.
As such, he expects MUST’s aggregate leverage to increase and hit 51.5% at end-FY2023.
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Koh has cut his distribution per unit (DPU) forecast for FY2024 by 45% due to a 969:1,000 rights issue with an issue price at 12 US cents, or a 30% discount to prevailing market unit prices to raise US$215 million. The rights issue is slated to reduce MUST’s aggregate leverage to 38% as at end-FY2024.
“MUST’s low physical occupancy of 30% represents headwinds in a depressed office market. It has to continue to deleverage due to likely revaluation losses at end-FY2023, which is aggravated by the recent series of non-renewals, downsizing and downturn in the US office market,” says Koh.
“Equity fund raising is difficult as it is trading at a steep 70% discount to [its] net asset value (NAV) per unit of 57 US cents,” he adds.
As at 10.52am, units in MUST are trading 0.2 US cents higher or 1.16% up at 17.5 US cents.
