RHB Bank Singapore analyst Vijay Natarajan has downgraded Manulife US REIT (MUST) to “trading buy” from “buy” as he sees a “long road ahead” for the REIT. The analyst has kept his target price unchanged at 12 US cents (16 cents).
In his report dated Feb 9, the analyst notes that MUST’s top-line for the 2HFY2023 ended Dec 31, 2023, beat his expectations due to the one-off termination income. MUST reported a gross revenue of US$108.5 million ($146.4 million) for the six months, 6.2% higher y-o-y.
However, its occupancy levels are expected to remain weak in the near-term, falling to around 80% in the 1QFY2024 when the TCW Group exits. That said, the REIT’s management has noted a pick-up in leasing momentum with notable deals including the expansion of Hyundai’s premises at Michelson and The Children’s Place at Plaza.
Capitol, Sacramento, and Figueroa, Los Angeles, which are among the most impacted office markets, also saw new leases from insurance and public administration tenant for long lease terms in 4QFY2023, notes the analyst.
MUST’s asset valuation also fell by a higher-than-expected 8% h-o-h on the back of discount rate increases, higher terminal cap rates and tighter property level occupancy assumptions. Nearly half of the valuation decline came from MUST’s Tranche 1 portfolio core assets which have been earmarked for disposals to lower its gearing.
At this point, Natarajan believes that MUST’s valuations are nearing the bottom and have “sufficiently priced in the considerable market weakness” after dropping by some 35% since 2020.
In his view, a key catalyst would be the solid execution of the REIT’s asset disposition plans.
“With [MUST’s] sponsor now stepping in, we see a share price floor at current levels,” he says.
After lowering his occupancy and backfilling assumptions, Natarajan has lowered his net property income (NPI) forecasts for FY2024 and FY2025 by 10% and 11% respectively.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
His target price is pegged at 0.35 times FY2024 book value. No environmental, social and governance (ESG) premium was ascribed as MUST’s ESG score of 3.1 is in line with the country median.
UOB Kay Hian analyst Jonathan Koh has kept his "buy" call on MUST as he sees the REIT manager as "pulling multiple levers to deleverage" for the 2HFY2023.
Koh has also upped his target price to 15.5 US cents from 14 US cents as MUST's distributable income for the 2HFY2023 stood above his expectations. He also sees a pick-up and positive momentum in leasing activities. The REIT's cost of debt also stood stable after its loan restructuring, even though its gearing remains elevated even after the divestment of Park Place in Arizona.
In the FY2024, Koh forecasts MUST to retain a distributable income of US$54.7 million and a distributable income of US$54.6 million in FY2025. He also expects the REIT to post a distribution per unit (DPU) of 2.8 US cents in FY2026.
Koh's new target price is based on a "punitive" cost of equity of 13.0% from 10.0% previously and terminal growth of 0%.
As at 10.35am, units in MUST are trading 0.1 cent lower or 1.67% down at 5.9 cents.
