Brokers’ take: DBS nearly halves Manulife US Reit’s target to US$0.24, maintains ‘buy’

DBS Group Research has lowered its target price for Manulife US Real Estate Investment Trust (Reit) by 46.7 per cent to US$0.24 from US$0.45, but maintained “buy” on the counter. 

The new target price represents a potential upside of 70.2 per cent from Manulife US Reit’s trading price of S$0.141 as at 11.45 am on Friday (May 19). At the time, the counter was down 1.4 per cent or US$0.002. 

The analysts said a capital injection could help ease some of the Reit’s gearing woes. Its aggregate leverage, as of its Q1 2023 operational updates released on May 11, stands at 49.5 per cent, just shy of the Monetary Authority of Singapore’s leverage limit of 50 per cent. 

On Apr 12, Manulife US Reit said it is still in talks with Mirae Asset Global Investments over a possible capital injection via a subscription in new units. Around a month later, the manager said it “substantially completed” due diligence processes on the potential deal.  

Although dilutive to existing unitholders, this scenario has been “substantially priced in” at the Reit’s current trading price, DBS noted. Assuming the capital raised is at a 10 per cent discount to current prices, the bank estimated that the Reit would still offer a fully diluted yield of around 19 per cent for FY2023, which is still “way above” its historical mean. 

To bring gearing closer to a 40 per cent level, US$175 million in overall capital injection would be needed, said DBS. This will allow the Reit to protect itself against possible declines in asset valuations in the future. 

SEE ALSO

Manulife US Reit’s occupancy falls to 86.1% as top tenant gives up a quarter of leased space

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

On May 11, the Reit’s manager announced a decline in portfolio occupancy to 86.1 per cent for the first quarter ended Mar 31, after a top tenant downsized its headquarters at the Reit’s Phipps building in Atlanta by 69,000 square feet (sq ft) to 209,000 sq ft. 

DBS cut its distribution per unit forecasts from FY2023 to FY2024 by 9 per cent to 21 per cent. This would factor in higher vacancy and costs, and increasing interest costs. This estimate has yet to factor in any potential capital injections. 

DBS said Manulife US Reit’s portfolio, which includes Class A office buildings in key cities in the US, is poised to ride on the “flight to quality” trend in the US office market. This comes as American corporates rationalise their office space post Covid-19, given the rise of flexible work arrangements.