Worse-than-expected valuation cuts

Analysts have downgraded Manulife US REIT (MUST) after the REIT’s portfolio valuation fell by 14.6% to US$1.63 billion ($2.16 billion) as at June 30, down from the valuation of US$1.91 billion as at Dec 31, 2022.

The decline was much greater than expected, says William (Tripp) Gantt, CEO of MUST in a call to media and analysts on July 18.

The valuation drop caused the REIT’s aggregate leverage to spike to 57% as at June 30, with the erosion of capital values “more severe than anticipated”, says UOB Kay Hian analyst Jonathan Koh.

“The discount rate used in [MUST’s] valuation increased by 50 to 125 basis points (bps), while terminal cap rate increased by 25 - 100 bps. Overall, the cap rate for its portfolio expanded 75 bps from 6.25% to 7.00%,” Koh writes.

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In its statement, the REIT noted that about 60% of the decline came from five properties, namely Figueroa (–US$37 million or –17.5%), Michelson (–US$36 million or –12.3%), Exchange (–US$32 million or –11%), Penn (–US$32 million or –20.5%) and Phipps (–US$31.9 million or –15.2%).

At the same call, the REIT manager cautioned that US office valuations remain under pressure and could continue to decline in 2023.

As such, Koh has downgraded MUST to “sell” while slashing his target price to 16.5 US cents from 47 US cents previously.

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He has also estimated that the fair value of MUST’s investment properties may drop by 21% to US$1.37 billion as at end-2023, a steeper decline from his previous estimate of 15%. This is assuming that the cap rate for MUST’s portfolio expands by 100 bps (from his previous estimate of 50 bps) to 6.8% (from 6.3% before).

“Thus, we expect aggregate leverage to increase and hit 55.2% at end-2023 (previously 51.5%),” Koh writes.

In addition, Koh has cut his distribution per unit (DPU) forecast for FY2024 by 17% due to a 1,400:1,000 rights issue (from 969:1,000 rights issue) with an issue price of 10 US cents (from 12 US cents) to raise US$260 million (US$215 million) and reduce aggregate leverage to 39.3% as at end-FY2024.

“MUST is likely to need an infusion of equity capital. We hypothetically assumed an equity fundraising exercise to make our valuation for MUST more comparable to that of other US office REITs,” says the analyst.

His new target price is based on a fully diluted FY2024 P/NAV of 0.5x adjusted for rights entitlements.

‘Too little too late’ for MUST: DBS

DBS Group Research analysts Rachel Tan and Derek Tan have taken an equally negative outlook on MUST as they downgraded their call to “fully valued” from “buy”. Like UOB Kay Hian’s Koh, the analysts have slashed their target price down to 10 US cents from 24 US cents previously.

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“We have, in our past reports, envisioned a roadmap which highlights a more urgent response from the sponsor (through asset sales and/or equity injection) towards MUST, to prevent an incidence of any further breach of the financial covenants, but found the timing to be lacking,” the analysts write.

“With a spiralling debt crisis and a near-term ‘dividend stopper’, we believe that equity shareholders will not be compensated if they wait out a recovery. As such, we see weakness in the stock price in the interim,” they add.

In addition, the analysts have raised their discount rate assumptions to a weighted average cost of capital (WACC) of 8.6% (versus 6.8% previously) with a revised target price of 10 US cents.

“Based on a revised book of 42 US cents per share, our target price implies a P/B of 0.2x,” say the analysts.

The analysts have also forecasted a DPU decline of a CAGR of 15% from FY2022 to FY2024 due to the higher refinancing costs.

RHB and CGS-CIMB keep calls

RHB Bank Singapore analyst Vijay Natarajan has kept “buy” on MUST while reducing his target price on MUST to 25 US cents from 40 US cents previously.

The decline of MUST’s portfolio valuation was more than double what Natarajan anticipated, and this is on top of an 11% decline announced at the end of 2022, the analyst notes.

Following the revaluation, MUST’s NAV is expected to be around 40 US cents.

In its call, MUST’s manager revealed that it is actively discussing with its sponsor and lenders to “remedy the situation”, to which Natarajan believes that it is “high time” for the REIT’s sponsor, Manulife, to show “more active and immediate support”.

“Manulife, with its strong financial position, could help offer support in the form of the completion of the proposed acquisition of The Phipps from the REIT, preferably at an average of year-end (December 2022) and latest valuation as well as potentially buying back a few more assets from the REIT, and working with the lenders in resolving and offering continued financial support to the REIT,” he writes.

He adds that if needed, Manulife should “provide a shareholder loan or act as a lender of the last resort”.

In its statement, MUST’s manager guided that it is considering seeking a disposition mandate from unitholders that would help in providing more flexibility to dispose of certain assets as long as the disposition meets certain conditions.

“This, in our view, is reasonable as the current buyers’ market conditions need a speedy execution process,” says Natarajan.

In addition to his lowered target price, the analyst has lowered his DPU estimates for FY2024 and FY2025 by 5% and 3% respectively by adjusting his occupancy assumptions and raising his cost of equity (COE) assumptions by 5 percentage points amid “increased uncertainty”.

His “buy” call comes as he sees “some upside potential, even in an orderly liquidation scenario” as the REIT is still trading at a 60% discount to book even after the revaluation.

MUST’s environmental, social and governance (ESG) score of 3.2 out of 4.0 is two notches above RHB’s country median score. As such, a 4% ESG premium has been applied to MUST’s target price.

CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong have also kept their “add” call with a lower target price of 41 US cents down from 55 US cents previously. Even after their revised target price, Lock and Ong remain the most upbeat on MUST’s prospects.

In their report, the analysts see that MUST’s unit price has already priced in much of the challenges that the REIT is currently facing with “value starting to emerge at the current level”.

Like their peers, Lock and Ong have cut their DPU estimates from FY2023 to FY2025 by 11.4% to 16.2% after factoring in the income vacuum from the early termination of MUST’s fifth tenant, The Children’s Place, as well as the divestment of the Tanasbourne property. — Felicia Tan

Disappointing FY2023 market statistics

RHB Bank Singapore analyst Shekhar Jaiswal has kept his “neutral” call on Singapore Exchange (SGX) after the exchange reported a “disappointing” set of market statistics for the FY2023 ended June 30. Jaiswal’s report comes after SGX reported its market statistics for June on July 12.

The exchange’s securities daily average value (SDAV) climbed 14% m-o-m and 2% y-o-y to $1.2 billion while the total securities market turnover value rose 3% m-o-m to $23.7 billion. For FY2023, however, both securities turnover and SDAV “disappointed” Jaiswal’s expectations with declines of 14% and 13% on a y-o-y basis, respectively. FY2023’s SDAV stood 2% lower than the analyst’s forecast.

SGX’s derivatives daily average volume (DDAV) also stood lower than expected, with the FY2023 DDAV coming 4% below Jaiswal’s forecast. However, June’s DDAV surged by 15% m-o-m and remained flat y-o-y.

Following June’s statistics, Jaiswal has trimmed his earnings estimates for FY2023 to FY2025 by 3% to 4%. “We maintain our below-consensus forecasts and reiterate our weak outlook for SGX’s cash equities business. Its forward P/E is at the historical mean, i.e. fairly valued,” he writes.

At its share price of $9.90, as at Jaiswal’s report on July 14, he notes that SGX’s shares have outperformed the benchmark Straits Times Index (STI) but the company “lacks near-term catalysts”.

“Amidst the relatively defensive nature of its earnings, year-to-date (ytd), SGX’s share price has outperformed the STI by 7%. However, this brings its forward P/E in line with its historical P/E mean of [around] 22 times. While SGX’s non-cash equity businesses (the fixed income, currencies and commodities and equity derivatives business, for example) are key long-term growth drivers, we continue to maintain our below-Street FY2024 earnings for now,” he says. “SGX’s stock offers a dismal 3.4% forward dividend yield. We value the stock by applying a 22times P/E on its FY2024 earnings per share (EPS).”

Despite his lowered earnings estimates, Jaiswal has upped his target price marginally to $9.90 from $9.80. His target price includes an environmental, social and governance (ESG) premium of 8% to its fair value estimate of $9.20, as SGX’s ESG score is four notches above the country median. — Felicia Tan

RHB Bank Singapore is maintaining its “neutral” call on CDL Hospitality Trust (CDLHT) with an unchanged target price of $1.25, as data has shown steady growth in Singapore visitor arrivals and a promising 2024 with major concerts and air shows coming up.

“However, we expect the return of high-spending Chinese tourists to remain weak and see a slow recovery in corporate travel. CDLHT also faces challenges from rising interest costs and foreign exchange (FX) impact,” says analyst Vijay Natarajan.

In his July 12 report, the analyst notes that the 6.3 million visitors of 1H2023 were equivalent to 2022’s numbers or 67% of pre-pandemic levels. Most visitor arrivals were fuelled by the key markets of Indonesia, India and Malaysia.

Thanks to the higher visitor arrivals, hotel revenue per available room (RevPAR) for 5M2023 surged 21% from pre-Covid-19 levels (5M2019). This was a result of a strong 32% increase in room rates from pent-up demand from the tourism space, with the high-end segment seeing a heightened demand.

“Overall, we expect full-year Singapore RevPAR to come in 15%–20% above pre-pandemic levels and flatten out next year. This will remain the key driver of CDLHT’s net profit income (NPI), with two-thirds of its portfolio positioned on the mid-tier to upscale segment of the Singapore market,” writes Natarajan.

Meanwhile, the analyst still sees room for upside in CDLHT’s Singapore hotel valuations.

The recent sale of Park Royal Kitchener Hotel at a 24% premium is a strong indication of continued investor interest in the Singapore hospitality market, which will likely have a reverberating effect on upscale hotels.

“The sale, in our view, will likely result in positive valuation rerating for upscale hotels, benefitting the REIT’s Singapore assets,” says Natarajan.

CDLHT’s gearing at 37.5% as at 1Q2023 is modest according to the analyst but will be expected to rise by 1–2 percentage points (ppts) with the ongoing progressive payments for UK build-to-rent developments and asset enhancements in Singapore.

The trust’s management has said that it is on the lookout for acquisition opportunities, with a focus on overseas markets such as UK and Japan. It also sees opportunities from over-leveraged buyers.

Overall, Natarajan remains cautious of CDLHT and has three reasons to support his stance: slow recovery of China visitors coming back to Singapore; CDLHT’s earnings are weighed down by rising interest costs, as it has among the lowest debt hedges among S-REIT’s at about 56% and has nearly half of its debt maturing in 2023–2024; as well as performance at its overseas markets has been mixed and the analyst expects the rising SGD to weigh on overseas earnings.

“We expect Chinese visitor recovery to remain patchy and see a return to pre-pandemic levels only by 2025, in addition to rising inflationary pressures and dissipation of pent-up demand posing challenges for visitor arrivals,” adds the analyst. — Douglas Toh

Maybank Securities analyst Krishna Guha has initiated coverage of Lendlease Global Commercial REIT (LREIT) with a “buy” call and a target price of 80 cents.

The REIT owns several retail and office assets in the city centre and suburban areas in Singapore and Italy. On March 31, the REIT’s assets under management (AUM) stood at $3.6 billion with a net lettable area (NLA) of 2.2 million sq ft.

Calling LREIT a “gem waiting to shine”, Guha highlights several positive factors about the REIT, including its play on the retail rebound in Singapore and the “rejuvenation” of the micro markets where its key assets are located.

“LREIT’s two well-located Singapore malls ([which make up] 75% of [its] gross rental income or GRI) will continue to benefit from resilient domestic consumption and steady recovery in tourism. Reversions are growing and up 3.3% year-to-date (ytd) [and] 16% of rents are due for renewal in 2024,” writes Guha.

“Further, these two assets will benefit from plans to make the Orchard Road sub-precinct the destination of choice for youths and development of Jurong as the second central business district (CBD). The repurposed Grange Road car park will be operational next year, and we expect DPU accretion [of around 1%],” he adds.

Furthermore, LREIT’s lease structure — including its office master leases, which comprise 25% of its GRI, provide stability and step-ups, notes the analyst. LREIT’s supportive sponsor, Australian-headquartered Lendlease Group, is also a plus in Guha’s book. The group has a development pipeline of A$113 billion ($101.6 billion) and A$36 billion of funds under management (FUM). Its capital partners include more than 150 global institutional investors.

“LREIT is the sponsor’s only listed REIT, and it has right-of-first-refusal (ROFR) agreements for any stabilised retail and office assets. Locally, the sponsor owns 30% of Paya Lebar Quarter. Other notable projects include the redevelopment of SingTel HQ and the Certis HQ,” he writes.

“While funding metrics and macro conditions are challenging, we think the 7% yield and 15% discount to book largely offset such headwinds,” he says. As at March 31, LREIT’s gearing is at 39.3% and an adjusted interest coverage ratio (ICR) of 2x.

On environmental, social and governmental (ESG) terms, Guha highlights LREIT’s “strong” ESG credentials, noting that with its young portfolio, the REIT is the first Singapore-listed REIT to achieve net-zero emission. The REIT even outperformed its peers in the GRESB rankings.

For FY2023, Guha is forecasting the REIT’s distribution per unit (DPU) to come in at 4.68 cents and 4.44 cents for FY2024, down from LREIT’s FY2022 DPU of 4.85 cents. The drag in his earnings is due to higher borrowing costs. Downside risks to his view include higher interest rates, non-renewals of master leases and dilutive transactions. — Felicia Tan

Brokers' Digest: Manulife US REIT, SGX, CDLHT, Lendlease Global Commercial REIT

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Brokers' Digest: Manulife US REIT, SGX, CDLHT, Lendlease Global Commercial REIT

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