Manulife US REIT - RHB Invest 2023-01-03: Will The Sponsor Step Up?

• Manulife US REIT (SGX:BTOU)’s sharp valuation decline indicates that the US office market remains in a state of flux, and that our earlier view of a potential recovery in 2H22 was misplaced.
• - Read this at SGinvestors.io -
• Manulife US REIT's share price is trading at distressed valuations, ie at a >40% discount to marked-down book value.

Manulife US REIT reported worse-than-expected asset value decline of ~11%, bringing its gearing to the edge of ~49%,

• This was driven mainly by Figueroa, Los Angeles which saw a 33% drop in value, accounting for 48% of total value decline. This was mainly due to:
  1. - Read this at SGinvestors.io -
  2. downsizing of another Quinn Emanuel, and
  3. the cap rate rising by 100bps.
• On a blended basis, discount rates and terminal cap rate assumption by valuers are ~40-50bps higher. This was on the back of a sharp spike in rates, office transactions coming to a near-standstill in 2H22 due to the lack of interest, and banks pulling back on financing.
• Other assets of Manulife US REIT which saw a double-digit percentage valuation decline include Plaza, Exchange in New Jersey, Penn and Centerpointe in Virginia highlighting the greater impact in gateway cities while secondary markets fared relatively better.
• Manulife US REIT's gearing is at the edge of ~49%, the highest currently among S-REITs and closer to the maximum allowed threshold limit of 50%. Its interest cover ratio (ICR) as at end-Dec 20222 was estimated at 3.1x.
• S-REITs are allowed a maximum gearing of up to 50%, provided the ICR is above 2.5x and up to 45% if the ICR is below 2.5x. As interest rates have spiked up sharply since 2H22, we think the ICR could drop below 2.5x by end-2023 – indicating that remedial measures are needed soon.

Will sponsor Manulife lend support?

• Read more at SGinvestors.io.

Vijay Natarajan RHB Securities Research | https://www.rhbgroup.com/ 2023-01-03 SGinvestors.io

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