Manulife US REIT - OCBC Investment 2023-01-06: Higher Risk Profile But Seeking Solutions

Manulife US REIT - Higher Risk Profile But Seeking Solutions

  • Latest portfolio asset valuation fell 10.9% y-o-y due to challenging operating landscape and market transactions at weaker pricing.
  • Manulife US REIT's gearing expected to increase to 49%, just shy of the regulatory limit.
  • No breach of financial covenants for now, according to Manulife US REIT.

Manulife US REIT's net asset value expected to fall US$0.13 per unit

  • The real estate valuation of Manulife US REIT (SGX:BTOU)’s portfolio declined by 10.9% y-o-y to US$1,947.0m, based on its latest independent valuation, as at end-Dec 2022. The decline in valuation was attributed to a mix of weakening occupational performance in Manulife US REIT’s submarkets due to softer demand and leasing activity, as well as higher discount rates and capitalisation rates for certain properties on the back of macroeconomic headwinds and idiosyncratic risks at the property level.
  • Figueroa, Manulife US REIT’s third largest asset by property valuation (as at 31 Dec 2021), saw the most significant impairment, with its property valuation declining by 33.1% to US$211.0m. As a result, Manulife US REIT’s net asset value is estimated to fall US$237.4m, or US$0.13 per unit.
  • Despite the decline in valuation, the financial covenants in Manulife US REIT’s existing loans are not expected to be breached, according to Manulife US REIT.

Prioritising divestments to lower its gearing

  • Taking into account the decline in valuation, additional borrowings, fair value changes in investment properties and certain projections in the value of other total assets, Manulife US REIT’s ICR is projected to decrease to 3.1x (vs. 3.4x as of 30 Sep 2022). Gearing is expected to increase from 42.5% (as of 30 Sep 2022) to 49%, a whisker shy of the Monetary Authority of Singapore’s (MAS) regulatory gearing limit of 50% (minimum ICR of 2.5x required).
  • Manulife US REIT is prioritising divestments to lower its gearing level. We note that Manulife US REIT would need to raise ~US$170m to bring its gearing level down to 45%.

Headwinds could continue to pressure share price performance

  • While Manulife US REIT is trading at low valuations, we are turning more cautious on its outlook given potential risks from:
    1. a mild recession in the US in 2023 based on our house view;
    2. continued slowdown in leasing demand and activities in the US office market given structural challenges such as remote working;
    3. higher vacancy and lower rental growth at Manulife US REIT’s properties;
    4. divestment of assets at below book value given the challenging US office market;
    5. a potential equity fund raising should the divestment process be slower-than-expected or Manulife US REIT is not able to decrease its gearing level below 50% via proceeds from divestments, which could lead to huge equity dilution to unitholders in the event of an equity fund raising exercise;
    6. inability to refinance its loan, though we see the risk likely to be low at this juncture. Manulife US REIT has US$105m of debt due for expiry in 2023;
    7. further impairment of asset valuations should headwinds persist.
  • On the other hand, Manulife US REIT's share price could see some reprieve if it manages to carry out dispositions at reasonable valuations and/or it is able to secure replacement tenants for its Figueroa property.

Fair value estimate of US$0.41

  • Factoring in the expected impact of persistent headwinds, we decrease our distribution per unit (DPU) estimates forManulife US REIT by 3-9% for FY22-26. Meanwhile, we raise our cost of equity assumption from 10.5% to 11.8% on a higher beta input.
  • Collectively, our new assumptions lead us to a lower fair value estimate of US$0.41 for Manulife US REIT (previously US$0.47).

Chu Peng OCBC Investment Research | 2023-01-06

Previous report by OCBC:
2022-11-03 Manulife US REIT - Repositioning Amid Headwinds.

Price targets by 5 other brokers at Manulife US REIT Target Prices.
Listing of research reports at Manulife US REIT Analyst Reports.

Relevant links:
Manulife US REIT Share Price History,
Manulife US REIT Announcements,
Manulife US REIT Dividends & Corporate Actions,
Manulife US REIT News Articles

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