Analysts are mixed on Manulife US REIT (MUST) after the REIT manager announced that it will be divesting Capitol, a freehold 29-storey Class A office building in Sacramento, California, on Sept 30.
RHB Bank Singapore analyst Vijay Natarajan has downgraded the REIT to “neutral” from “trading buy” with an unchanged target price of 12 US cents (15 cents).
MUST announced that it will be selling the property to a local property player for US$117 million, which is below the property’s value of US$118 million as at Sept 1. The valuation was conducted independently by CBRE.
“Manulife US REIT’s divestment price of Capitol was below expectations, but the sale will lend much-needed liquidity and raises the odds of a successful restructuring,” says Natarajan in his Oct 1 report.
He notes that MUST purchased Capitol for US$199 million in September 2019 and the building was valued at US$158 million as at December 2023.
“The transaction reflects discounts of 41%, 26% and 1% to the purchase price and the latest two valuations [in December 2023 and September this year],” he points out.
“Capitol is currently part of MUST’s Tranche 2 stable of assets in its portfolio versus Tranche 1, which are identified as more challenging operational assets or markets. Management, however, noted that the divestment was done after taking into account all factors – in particular, the lack of debt financing and institutional buyer pool,” he adds.
In its announcement, MUST said the proceeds from the sale will be used to repay its FY2025 debt of US$131 million. The balance amount will come from the REIT’s internal cash.
The repayment is expected to result in a 42 basis point (bps) savings of MUST’s weighted average interest costs to 4.16% per annum (p.a.) from 4.58% as at 1HFY2024. The move will provide a longer runway for the REIT since it will have no debt repayments until 2026, Natarajan says.
After the sale and after repaying its debt, MUST’s aggregate leverage will be lowered to 54.2% from 56.3% previously.
Shares in MUST closed 0.8 US cents or 6.45% down at 11.6 cents on Oct 1. Year-to-date (ytd), the REIT has enjoyed a 45% surge in its unit price, up from 8 US cents at the beginning of this year. On a one-year basis, MUST’s units rose some 93.3% up from 6 US cents.
“US office conditions are slowly but steadily improving both on the leasing and financing fronts, but with MUST’s share price rebounding [around] 94% (over the last three months), near-term positives are mostly priced in,” notes Natarajan.
“Potential upside may come if further divestments are at closer to book value, while the US economy faltering would be a key risk,” he adds.
Following the divestment, the analyst has lowered his distributable income estimate for FY2025 and FY2026 by 14% and 11% respectively.
His unchanged target price is pegged to MUST’s FY2024 book value of 0.35 times.
Meanwhile, CGS International analysts Lock Mun Yee and Natalie Ong have kept their “add” call and target price of 22 US cents on MUST as they think the disposal is likely to remove any doubts over the REIT’s ability to monetise its assets and improve its liquidity position.
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However, they also note that the “challenging prospects” of the US office market and MUST’s ability to meet its net proceeds targets established under its master restructuring agreement may hamper its share price performance over the next six to 12 months.
“That said, we believe its current valuation of 0.4 times proforma 1HFY2024 P/BV has factored in much of its operational and financial challenges,” they write in their Sept 30 report.
The analysts have kept their FY2024 to FY2026 projections unchanged.
