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CGS-CIMB stays 'add' on Manulife US REIT but cuts TP by nearly 40% after DPU halt

Jovi Ho
Jovi Ho • 3 min read
CGS-CIMB stays 'add' on Manulife US REIT but cuts TP by nearly 40% after DPU halt
Plaza, one of the buildings within MUST's portfolio. Photo: MUST
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Manulife US REIT (MUST) BTOU -

is focusing on improving its liquidity position, say CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong.

The REIT’s manager announced at its results briefing on Aug 14 that it is halting distributions for 1HFY2023 ended June, after breaching its unencumbered gearing ratio based on financial covenants. The REIT’s ratio reached 60.2% at end-1HFY2023, but shrunk slightly to 59.7% in August upon making a “good faith repayment”.

As a result of the breach, all MUST’s loans have been reclassified as current liabilities as its lenders are contractually entitled to demand for immediate repayment of the outstanding amounts.

MUST indicated it remains focused on negotiations with lenders to lower its unencumbered gearing ratio to below 60%, formulate long-term liquidity plans such as the divestment of Phipps, pursuing a mandate to divest assets to reduce its debts and for capex and undertaking a strategic review of the REIT.

This includes discussions with several US and Asia-Pacific-based groups that are exploring asset acquisitions, capital injection and strategic transactions around the REIT platform. “We believe until there is more visibility on MUST’s negotiations for a waiver of its financial covenants, its share price could likely remain under pressure,” write Lock and Ong.

In an Aug 15 note, the CGS-CIMB analysts maintain “add” on MUST but with a lower target price of 25 US cents (33.96 cents), down from 41 US cents previously.

See also: Manulife US REIT halts DPUs in 1HFY2023; unencumbered gearing ratio down to 59.7%

MUST reported 1HFY2023 gross revenue of US$99.6 million, down 0.8% y-o-y. Distributable income fell 17.4% y-o-y to US$37.9 million, due to higher property operating expenses, increased finance expenses and divestment of Tanasbourne in April, though partly offset by higher termination fee and carpark income.

Portfolio occupancy, meanwhile, dropped 1 percentage point q-o-q to 85.1% at end-2QFY2023 due to non-renewals of some leases at Diablo and Capitol.

MUST leased/renewed 443,000 sq ft of space in 1HFY2023, and executed another 20,000 sq ft of leases after June, including an expansion at Michelson, a renewal at Peachtree and two new leases at Phipps and Capitol.

See also: Analysts downgrade Manulife US REIT after worse-than-expected valuation cuts

Demand came from finance and insurance, legal, retail trade and information sectors.

Overall, MUST posted a positive 3.7% rent reversion in 1HFY2023, though this was negative 2.5% in 2QFY2023.

MUST has a balance of 6.2% and 13.5% of leases expiring in 2HFY2023 and FY2024. According to property consultant Jones Lang Lasalle, leasing volumes in MUST’s submarkets continue to be weak; although lease terms are stable and occurrence of tenant concession packages appears to be moderating.

Lock and Ong are keeping their distributions per unit (DPU) forecasts at 3.9 US cents for FY2023 and FY2024 and 3.8 US cents in FY2025.

They lift cost of equity assumptions to 17.5% from 11.5% to factor in greater uncertainty over its FY2023 dividend payment and financial uncertainties.

“While the outcome of its negotiations with its lenders remains a near-term overhang on its share price, we believe current valuation of 0.23x FY2023 price-to-book ratio (P/BV) has factored in much of its operational and financial challenges,” write the CGS-CIMB analysts.

They are keeping a lookout for a quick conclusion to MUST’s negotiations with its lenders and a swift recovery of the US office transactions market. However, they also warn of slower-than-expected backfilling of vacated spaces impacting its near-term income visibility, and a protracted slowdown in the US economy, which could dampen appetite for MUST’s office space.

As at 10.43am, units in Manulife US REIT are trading flat at 8.9 US cents.

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