Manulife US REIT to acquire California property for US$199 million

U.S. one-dollar and five-dollar currency notes; taken September 2018.U.S. one-dollar and five-dollar currency notes; taken September 2018.

Manulife US REIT entered a deal to acquire the Class-A office building in Sacramento, California, from the owner of 400 Capitol Mall for around US$198.8 million, the U.S. focused REIT said in a filing to SGX Thursday.

The deal will be financed by a combination of loans and an equity fund-raising, the REIT said; it plans a private placement and preferential offering of new units to raise around US$142.1 million.

The property has 29-storeys, including a six-storey parking garage, making it the city’s tallest office tower, Manulife US REIT, or MUST, said, adding the occupancy rate was at 94.9 percent, with 44 tenants.

The acquisition is at a discount of 0.9 percent to the appraised fair value of US$200.5 million, the filing said.

“Sacramento is a premier business hub with low business and living costs and a flourishing economy driven by healthcare, government and tech,” Jill Smith, CEO of MUST’s manager, said in the statement.

“Not only is this acquisition 2.3 percent accretive, based on our first half 2019 pro forma distribution per unit, but it may also trigger a re-rating story for MUST as we inch closer to [inclusion in] the FTSE EPRA Nareit Index during its next review,” she added.

Inclusion in the index would provide a positive re-rating catalyst for the units, MUST said. The equity fund-raising is expected to increase the free-float by around 12.1 percent to US$1.30 billion, the filing said.

The REIT said that Sacramento is considered a cheaper alternative to San Francisco for business and living costs; the overall vacancy rate for the Sacramento Downtown/Midtown submarket Class A properties is at a multi-year low at 11.3 percent, the REIT said.

The property’s rental escalations average 2.3 percent a year, offering healthy organic growth, while its average in-place rent is up to 11.5 percent below the potential asking rent, MUST said.

The top-10 tenants, which include internationally recognized firms Wells Fargo and Morgan Stanley, and leading law firms have a long weighted average lease expiry of 6.4 years, MUST said.

MUST is a pure-play U.S. office REIT, with a portfolio of eight office properties.

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