'Work in progress' or 'worth a shot'? DBS upgrades Manulife US REIT to 'buy' on impending debt restructuring plan

“We sense that the tripartite discussions to resolve the debt covenant breach is likely approaching a resolution.”

Manulife US REIT (MUST) is “still [a] work in progress”, say CGS-CIMB Research analysts after the release of the US office Singapore REIT’s (S-REIT) results for 3QFY2023 ended September on Nov 3.

As at end-3QFY2023, MUST’s aggregate leverage stood at 56%, based on the Monetary Authority of Singapore’s (MAS) guidelines, while its interest coverage (ICR) slipped to 2.4x.

With its interest rate hedges progressively rolling off, the proportion of fixed rate loans dipped to 69.2% in 3QFY2023 from 80.2% in 2QFY2023, while interest cost rose q-o-q to 4.38%.

“With US office values still under pressure for 2023, we believe gearing should remain elevated in the near term,” write CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong.

In a Nov 4 note, Lock and Ong are keeping “add” on MUST with an unchanged target price of 25 US cents (33.81 cents), which represents a 331% upside against its last traded price of 5.8 US cents.

MUST’s share price collapsed over the past year and has further retreated by two-thirds since July on the back of its announcement of its breach in financial covenants and a halt on distributions from 1HFY2023 ended June.

Occupancy slips, AEI shines

MUST’s 3QFY2023 portfolio occupancy slipped q-o-q to 84.7% from 85.1% at the end of 2QFY2023. Physical occupancy has inched up but remains in the mid-30% to 40% range.

During the quarter, MUST leased or renewed 193,000 sq ft of space, adding to a 9MFY2023 total of 636,000 sq ft. This includes the early renewal of its fourth-largest tenant, Kilpatrick Townsend at Peachtree, for a five-year extension till 2030.

The manager of MUST announced in November 2022 an US$18 million asset enhancement initiative (AEI) at Peachtree, a 28-storey, Class A office building in Atlanta. The renovations, which will see a new lobby, elevator cabs, upgraded landscaping and hardscaping of the building exteriors among some of the changes, are expected to be completed in 2025.

Following the announcement of the Peachtree AEI, rents at Peachtree have been on a rising trend, from mid-US$20 per sq ft to close to US$30 per sq ft.

Renewal demand made up 90% of the leases signed in 3QFY2023. Tenants were mainly from the legal, finance & insurance, healthcare, accounting, construction and information sectors.

Overall, MUST posted positive rent reversion of 24.2% in 3QFY2023. MUST has a balance of 5.6% and 13.4% of leases expiring in 4QFY2023 and FY2024 respectively.

According to property consultant Jones Lang Lasalle, although leasing volumes in MUST’s submarkets continue to be slow, lease terms are lengthening, notes CGS-CIMB. Net effective rents appear to be stabilising, and tenant incentives are moderating. That said, sub-leasing activities continue to inch up q-o-q as tenants sublease their under-utilised spaces.

Sponsor package assembled

Discussions between MUST, its sponsor and lenders are ongoing, says the manager. The manager says it has assembled a sponsor package, and execution of this package will depend on lenders’ approval. In addition, it has identified non-core assets for sale based on future return potential and capex requirements.

In a Nov 6 note, DBS Group Research analysts Rachel Tan and Derek Tan wonder if MUST is “worth a shot”.

“We sense that the tripartite discussions to resolve the debt covenant breach is likely approaching a resolution, which we believe should re-rate the stock from current <0.2x P/B. Albeit more of a trading opportunity, we believe the announcement [or] disclosure of their debt restructuring plan will be a relief for unitholders, averting a worse-case scenario of a liquidation.”

That said, the devil is still in the details of how MUST and its sponsor plan to resolve the debt issue, write the DBS analysts. “We envision that the REIT will most likely still need an equity raise in the medium term to bring forth a longer-term sustainable recovery.”

DBS has upgraded MUST to “buy” from “fully valued” with an unchanged target price of 10 US cents. “Given that share price has overshot on the downside, it is currently trading at [a] highly discounted valuation that could be worth a shot, though this is against a backdrop of high share price volatility which in turn will be driven by news, reactions to it and market sentiments.”

Marc Lawrence Feliciano was recently appointed board chairman, replacing Stephen James Blewitt. Feliciano is global head of real estate, private markets for Manulife Investment Management, the REIT’s sponsor.

“We hope that this bodes well for MUST and that the sponsor would take more actions with Marc onboard now,” says DBS.

As at 10.11am, units in Manulife US REIT are trading 0.1 US cents lower, or 1.33% down, at 7.4 US cents.

See Also:

• Click here to stay updated with the Latest Business & Investment News in Singapore

• Netlink NBN Trust results in-line with analysts’ expectations

• CGS-CIMB lowers target price for Paragon REIT to 88 cents after limited upside potential

• Manulife US REIT could keep Phipps, divest non-core assets in refinancing package

• Read more stories about where the money flows, and analysis of the biggest market stories from Singapore and around the World

• Get in-depth insights from our expert contributors, and dive into financial and economic trends

• Follow the market issue situation with our daily updates

• Or want more Lifestyle and Passion stories? Click here