Manulife US REIT ‘adding more crown jewels’ with asset buys: RHB

U.S. two-dollar billsPhoto by Leslie Shaffer

Manulife US REIT’s acquisition of two new assets from its sponsor is “adding more crown jewels” and reiterates strong sponsor commitment to the REIT’s growth, RHB said in a note on Monday.

The REIT said last week that it acquired 1750 Pennsylvania Avenue in Washington, DC, and Phipps Tower in Atlanta, GA for a total cost of US$387.0 million, an around 2 percent discount to the average of two independent valuations, the note said.

“Both the assets have excellent attributes which include good location, strong tenants and a long WALE (weighted average lease expiry), complementing its existing assets,” RHB said. “While we note that there is some concern on the REITs rapid pace of acquisition-led growth, we believe that acquisitions have not compromised unit holders’ interests and would ultimately benefit them.”

RHB said the deal was yield accretive, with 1.4 percent pro forma accretion to 2017 dividend per unit, and both assets were recently completed and renovate, which should minimize capex needs.

It noted both buildings have passing rents around 12-25 percent below market average.

“While the near-term upside is minimal due to locked-in leases, the under-rented portfolio presents good room for organic rent growth in the future,” RHB said.

It kept a Buy call with a US$1.00 target price, raised from US$0.98 previously. The unit ended Monday up 0.54 percent at US$0.925.

Some deal concerns

Separately, Deutsche Bank said in a note last week that it had some concerns on the deal.

“We believe that the assets are attractive, prime assets in key growth markets of the U.S.,” Deutsche Bank said. “However, we believe that funding structure will be a key determining factor in share price performance moving forward.”

The German investment bank said that if the acquisition is funded by a debt financing of US$236.5 million and equity fundraising of US$160.5 million, pro forma dividend per unit would be flat.

But it kept a Buy call with a US$1.00 target, saying valuations remained attractive, with a 2018 dividend yield of 6.5 percent.

DBS also voiced some doubts on the deal, although it noted it was generally positive on the deal.

“We believe some investors may question the relatively low accretion of 1.4 percent given the 2.2-2.3 percent accretion from MUST’s other acquisitions,” DBS said in a note on Monday, adding that gearing could rise over 40 percent.

But DBS said that for the time being, it would keep a Buy call and US$1.00 target price.