Date of Report: September 30, 2024
Broker: CGS International Securities
Overview of Manulife US REIT
Manulife US REIT (MUST) is progressing with its strategic asset disposition plan aimed at improving liquidity and financial stability. The REIT is focused on divesting properties to reduce leverage and strengthen its portfolio amidst challenging market conditions in the U.S. office sector.
Key Transaction: Sale of 400 Capitol
On September 30, 2024, Manulife US REIT announced the sale of its 400 Capitol property for US$117 million. This was slightly below its September 2024 independent valuation of US$118 million and significantly lower than its end-FY23 valuation of US$158 million. The US$117 million sale price factors in a seller’s credit of approximately US$6.2 million, covering tenant improvements, free rent, and lease commissions.
The transaction is expected to close by the fourth quarter of 2024, with the buyer being an all-cash purchaser who holds other assets in the Sacramento area. At the end of 1H24, 400 Capitol had a committed occupancy rate of 89.9%.
Impact on Leverage and Debt
The net proceeds from the sale, along with MUST’s existing cash reserves, will be used to repay US$130.7 million in loans due in 2025. Following this repayment, Manulife US REIT will not have any debt maturities until 2026. The REIT’s proforma aggregate leverage is anticipated to improve to 54.2%, and its average debt cost will be lowered to 4.16%.
The book value per unit (NAV) is expected to decrease slightly to US$0.31 from US$0.34/unit as of the end of 1H24. MUST views this divestment as a critical step toward improving liquidity and supporting leasing efforts for its remaining properties. As of the end of this transaction, MUST will have achieved 47% of its 2024 net proceeds target (US$230 million) and 33% of its 2025 target (US$328.7 million).
Financial Outlook and Target Price
The broker reiterates an “Add” rating for Manulife US REIT with a target price of US$0.22, unchanged from the previous target. Despite the challenges facing the U.S. office market, the REIT’s current valuation of 0.4x proforma 1HFY24 price-to-book value (P/BV) reflects the operational and financial difficulties it is navigating. Positive re-rating catalysts for MUST could include a faster pace of asset monetization and a recovery in the U.S. office transaction market, which could bring more financial stability.
Downside risks include slower-than-expected leasing of vacated spaces, which could impact 12-month income visibility, and a prolonged U.S. economic slowdown, which might decrease demand for office space.
ESG Initiatives
Manulife US REIT is also focused on improving its environmental, social, and governance (ESG) metrics. According to LSEG, its overall ESG score for 2023 stands at B-, with the following breakdown:
- Environmental: B
- Social: B
- Governance: C-
Notably, MUST received an A+ rating for ESG Controversies and achieved several sustainability milestones, including a 34.1% reduction in greenhouse gas emissions intensity from its 2018 baseline, a 29.8% reduction in energy intensity, and a 21.6% reduction in water usage intensity by the end of FY23. The REIT’s green-certified portfolio reached 93% of net lettable area (NLA) at the end of FY23.
Financial Summary
Manulife US REIT’s financial performance is summarized below:
- Gross Property Revenue: US$202.6 million (2022), US$208 million (2023), projected US$179 million (2024)
- Net Property Income: US$113.2 million (2022), US$114.6 million (2023), projected US$104.4 million (2024)
- Net Profit: (US$129.7 million) (2022), (US$380 million) (2023), projected US$55.9 million (2024)
- Distributable Profit: US$84.05 million (2022), US$0 million (2023), projected US$83.33 million (2026)
- Dividend Per Share (DPS): US$0.048 (2022), no dividends expected for 2023 and 2024, projected US$0.045 in 2026
- Leverage: Projected asset leverage for 2024 is 55.5%, with a slight decline to 54.6% in 2025.
Conclusion
Manulife US REIT continues to execute its asset disposition strategy to enhance liquidity and reduce leverage. While the challenging U.S. office market presents hurdles, the REIT’s efforts to improve its financial position and sustainability performance are noteworthy. Investors may anticipate moderate recovery in the coming years, particularly if the U.S. office market stabilizes.
