Brokers’ take: UOBKH reinitiates coverage on Manulife US Reit with ‘buy’
Chong Xin Wei
UOB Kay Hian (UOBKH) on Friday (Jun 23) reinitiated coverage on Manulife US Real Estate Investment Trust (Manulife US Reit) with a “buy” call and a target price of US$0.47.
The new target implies a potential upside of 171.7 per cent from the closing price of US$0.173 (unchanged) on Friday.
The brokerage said that Manulife US Reit’s negatives have largely been priced in. The Reit was recently hit by a series of downsizing and non-renewals by key tenants, including early termination by The Children’s Place at Plaza in Secaucus in the eastern US state of New Jersey.
The Children’s Place, which vacates its space on May 31, 2024, is Manulife US Reit’s fifth-largest tenant by gross rental income and contributes 3.3 per cent of the Reit’s overall gross rental income.
The research team said that portfolio occupancy could fall by nine percentage points to 79 per cent by the end of 2024, if the vacancies are not backfilled. It noted that lower occupancy could lead to more downsizing.
“Manulife US Reit is hampered by its large exposure to California (Irvine, Los Angeles and Sacramento) and Washington DC, which accounted for 36 per cent and 8 per cent of portfolio valuation, respectively,” said UOBKH analyst Jonathan Koh.
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The research team projects the fair value of the Reit’s investment properties to fall by 15 per cent to US$1.5 billion by the end of 2023, assuming capitalisation rate rises to 6.3 per cent. This comes amid a drop in capital values for office properties, UOBKH said, citing end-March figures from the RCA Commercial Property Price Index.
UOBKH also expects aggregate leverage to hit 51.5 per cent by the end of 2023. However, the Reit’s divestment of its properties could allow gearing to fall by 4.3 percentage points to 45.2 per cent, assuming a capital expenditure of US$25 million per year.
Last month, the Reit entered into a letter of intent to sell Phipps Tower in Atlanta, Georgia, and redeploy the proceeds into repaying debt or capital expenditure. In April, it also disposed of Tanasbourne, its property located in Hillsboro, Oregon, for US$33.5 million.
Amid potential revaluation losses, Koh highlighted that the Reit “has to continue to deleverage”. He said equity fundraising could be difficult as the Reit was trading at a “steep” 70 per cent discount to its net asset value per unit of US$0.57.
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