The manager of Manulife US REIT (MUST) BTOU -0.57% has announced that its fifth-largest tenant by gross rental income (GRI) has exercised an early termination of its lease at 500 Plaza Drive, also known as Plaza, in New Jersey.

 

According to a bourse filing on June 7, MUST&rsquo s tenant, The Children&rsquo s Place, has exercised its early termination rights for the leases expiring May 31, 2029 and will vacate its 197,949 sq ft of space on May 31, 2024.

 

The tenant contributes 3.3% of MUST&rsquo s overall gross rental income.

 

The leases include a one-time early termination option, which the tenant has chosen to exercise, says the manager. The tenant is obligated to pay rent until May 31, 2024 and has paid a termination fee of approximately US$4 million ($5.38 million).

 

The manager says it is currently working to secure new leases to fill the space occupied by the tenant. The tenant&rsquo s current rental is below the passing rents at the 11-storey property by approximately 16%, and market rents by approximately 21%.

 

Assuming that the lease was terminated on Jan 1, 2022, the pro-forma impact on MUST&rsquo s distribution per unit (DPU) on the loss of revenue for FY2022 would be a reduction in DPU before retention from 4.97 US cents to 4.62 US cents.

 

Manulife US REIT&rsquo s (MUST) BTOU 0.00% decision to sell an Atlanta asset to its sponsor is &ldquo a deal that matters&rdquo and will move the needle in lowering the REIT&rsquo s persistently high gearing, say DBS Group Research analysts Derek Tan and Rachel Tan.

 

On May 24, MUST&rsquo s management announced that they have entered into a letter of intent with its sponsor, The Manufacturers Life Insurance company, or Manulife, for the potential sale of Phipps Tower.

 

Phipps is valued at US$210 million ($283.88 million) as of December 2022, down 2.8% y-o-y. The property roughly accounts for some 10% of MUST&rsquo s net asset value, which was US$1.02 billion at the last valuation.

 

DBS&rsquo s analysts say Phipps is &ldquo one of the gems in the portfolio, which has historically shown resilient cash flows&rdquo .

 

They add in a May 24 note: &ldquo While the potential sale of a property with strong attributes could mean that the impact from occupancy challenges faced by MUST&rsquo s other existing properties is amplified, we see this as a potential bitter pill to swallow in order to bring forth more stability for the portfolio.&rdquo

 

Assuming it is sold at US$200 million, or a 5% discount to the last valuation, with the proceeds used to repay debt, the sale will bring MUST&rsquo s gearing down towards the 42%-43% level, says DBS. This will cure the perception of a stretched balance sheet, with MUST&rsquo s gearing at 49% during its results briefing for 1QFY2023 ended March.

 

Based on the reported US$12.2 million net property income for FY2022, DBS&rsquo s assumed transaction price of US$200 million will imply an exit yield of 6.0%.

 

The proposed divestment is subject to the execution of a definitive agreement with the sponsor where the purchase consideration is to be no more than the average of two average independent valuations commissioned by the manager and the trustee, a price that will be internally approved by the purchaser and discussed at an extraordinary general meeting (EGM).

 

Minimal dilution, lower risk of large fundraising

 

With the proposed sale, the risk of sizable equity fund raising (EFR) by MUST&rsquo s management is reduced substantially, says DBS. &ldquo Post the deleveraging of its balance sheet to 42%-43%, the risk of a sizable dilutive fundraising, estimated at US$175 million, is reduced and we see a possible lift in the share price overhang of the stock.&rdquo

 

That said, DBS believes that capital of US$50 million to US$75 million needs to be raised to bring gearing towards the 38%-39% level, a strategy that the analysts believe is still in consideration.

 

The analysts had raised the US$175 million figure in an earlier research note. On May 18, DBS nearly halved its target price on MUST to 24 US cents, warning that the rescue from potential acquirer Mirae could be dilutive to distribution per unit (DPU) by some 42%-47%.

 

The earlier note predates the May 24 announcement by MUST. DBS had based its calculations on media reports that Mirae intends to acquire a stake in MUST and its manager for some US$150 million.

 

Based on this, DBS had estimated that a likely scenario would include a US$109 million capital injection by Mirae into MUST, or 32% stake of the enlarged entity. Meanwhile, the remaining US$41 million would be used to acquire the REIT manager, based on a ballpark estimate of 6x price-to-earnings (PE).

 

Exclusive no more

 

At the same time, the manager announced on May 24 that the exclusivity period regarding the potential transaction with Mirae Asset Global Investments has lapsed. While the manager is open to ongoing discussions with Mirae, it is also considering other proposals with other partners in relation to a strategic transaction involving MUST.

 

The lapse of its exclusivity with Mirae provides MUST with the flexibility to pursue other strategic investments or mergers and acquisitions with other interested platforms, say DBS&rsquo s analysts. &ldquo Over time, investors will want to see more commitment with the sponsor (Manulife or new investors) to support the REIT in its growth journey.&rdquo

 

At the release of MUST&rsquo s results for 1QFY2023 ended March, the manager said the team is working &ldquo expeditiously&rdquo with Miae and aims to update unitholders with the finalised proposal by 2Q2023.

 

Now, DBS anticipates a near-term relief rally on the stock. While the stock was up 20% on May 23 to 17 US cents per unit, it is still trading at 0.3x price-to-book value (P/B) and offering a forward yield of 24%-25% (pre-disposal).

 

DBS&rsquo s target price is 25 US cents per unit. They believe that an upward revision will be subject to the outcomes of its strategic review and EFR that is yet to be announced.

 

(Manulife US Reit) has entered into a letter of intent to sell Phipps Tower in Atlanta, Georgia, to The Manufacturers Life Insurance Company.

 

The purchase consideration should be no more than the average of two independent valuations commissioned by the Reit&rsquo s manager and its trustee, DBS Trustee.

 

On Wednesday (May 24), the Reit&rsquo s manager said its proposed divestment aims to &ldquo enhance unitholder value&rdquo . It intends to redeploy proceeds into debt repayment or capital expenditure such as tenant incentives.

 

The Reit&rsquo s manager said it plans to enter into a definitive agreement for Phipps Tower&rsquo s disposal by Jun 30. It will also waive the disposal fee.

 

Additionally, the Reit manager is considering proposals from other prospective partners for its potential sale. This comes as the exclusivity period with Mirae Asset Global Investments has lapsed.

 

Manulife US Reit previously announced it was in talks with Mirae for the proposed sale of its manager. The manager had noted that it was negotiating key terms and expected the transaction to be completed around Q2 or Q3 of 2023.

 

The Reit also disposed of Tanasbourne, its property located in Hillsboro, Oregon, for US$33.5 million. Proceeds from the transaction will be used to lower its leverage, which stood at 48.8 per cent as at Dec 31, 2022.

 

Both the proposed sale of Manulife US Reit&rsquo s manager and its recent divestment of Tanasbourne come as part of the Reit&rsquo s ongoing strategic review.

 

Apart from these efforts, its manager said it is exploring other fundraising options. These include further asset dispositions to reduce gearing.

 

Proceeds from both divestments will be prioritised towards near-term loan maturities and essential capital expenditure, it added.