You can’t just ignore this kind of massive yield. I can’t.
Manulife REIT (MUST) shares tanked 43% since the start of this year, which makes this “pure-play” US office Singapore REIT really attractive.
What’s more today, MUST’s market cap trades at just half of what its assets are truly worth – MUST shares trade at just 0.55x P/NAV.
Why are investors so bearish about this Singapore REIT? Because of COVID? Because of rising rates? I mean, MUST shares trade like investors don’t want to be in US offices anymore.
Is that really the case? Let’s find out.
My previous article on Manulife REIT can be found here.
Background — What is Manulife REIT?
At US$666 million market cap, Manulife REIT (MUST) was the first US office REIT to be listed in Singapore, during 2016.
MUST owns freehold, class-A office assets across prime areas of US cities, including Washington DC, Los Angeles, Atlanta and so on. Back then, MUST overall occupancy rate was 96.5% — which was above average US offices’ occupancy rate.
And owning these first-class properties attracted some of the finest tenants, like the United Nations, the US Treasury, Hyundai Capital and Amazon.
Now, what I found appealing about MUST was its reputable Canadian sponsor – The Manufacturers Life Insurance Company, or Manulife Group.
Manulife Group is already a household name, with more than US$676 billion of assets under their management. Today, Manulife Group is also listed across many stock exchanges, including Toronto, New York and Hong Kong.
When MUST was listed, its IPO attracted many renowned investors, including sovereign wealth funds like the Oman Investment Fund, and many family offices.
With Manulife’s strong sponsor, MUST aggressively grew their portfolio from just three properties to 12 properties between 2016 and 2021.
That’s impressive. And that’s the problem.
The Biggest Bear on Manulife REIT
Investors believe MUST poor share performance must lie in its falling occupancy.
Well, it doesn’t help MUST has just lost two of its major, long-term tenants – TCW Group and Quinn Emanuel. Both tenants, part of MUST’s Figueroa office – and one of MUST stronger assets — will end their leases by next year.
No, clearly, the market is missing out something else: MUST has, what I call, an erectile dysfunction. It cannot fire anymore bullets. It cannot anymore grow its assets. Their aggressive portfolio expansion has come to an end.
Think about this. MUST’s gearing ratio already stands at 42.8% — close to its internal gearing ratio of 45%. MAS also limits Singapore REITs’ gearing to 50%. Such caps stop MUST from loading up fresh debt to buy properties.
I also cannot help but compare, MUST has the highest leverage amongst its friends — Prime US REIT’s gearing stands at 38.7%; Keppel Pacific Oak US REIT’s gearing stands is 37.5%. In fact, both US office REITs don’t even need to refinance their debt till 2024. Yet, MUST still needs to refinance debt in 2023.
Now, MUST’s impotence is also due to another huge problem — their heavily discounted share price.
This makes it even harder for MUST to issue rights via the stock market. What this means is, MUST needs to sell even more shares to raise money, at today’s beaten down price.
I mean, MUST management can force to raise rights to buy new properties, but at what cost?
On one hand, MUST has a portfolio of prime office assets. On the other hand, MUST needs to figure out how to fix their high gearing.
Why is Manulife REIT’s gearing so high?
One reason is because of its shrinking asset value during COVID – when people are not going back to offices. In 2020, property valuation dropped by US$128 million, more than than compared to 2019 (see red circle below).
Recall, gearing ratio is total debt divide by total assets.
Source: Manulife REIT FY2020 financial results
A high gearing also means MUST pay higher interests in this rising rate environment.
You see, a REIT grows their profits in two ways — whether it can raise rent the next year and the year after, which increases distributions to investors.
And the other way, which is more crucial, is a REIT’s ability to expand assets, in order to collect more rent.
So, what’s good news?
MUST is not all that gloomy.
So far, MUST has come up with fresh ideas like “hotelization”.
This is not turning offices into hotels. But turning office lobbies and the first few floors of offices into more luxurious lounges and workspaces. Or even converting rooftop into bars and restaurants.
To be honest, I don’t buy into this idea.
Tenants are practical business operators. If rents go up by too much because of says, a much nicer lounge, I suspect tenants will end up heading elsewhere.
However, based on MUST and JLL’s market research, these “hotelized” assets could grow rent by another 30%. In fact, MUST has started to “hotelized” its Peachtree asset.
I guess, this is something worth keeping a look out for.
Another thing, I think MUST should do is start selling off some of their less profitable assets. This frees up capital, but more important, reduce its leverage to buy higher quality properties.
In its latest third quarter financial results, MUST has improved their rental adjustments by 4.3% and most of their rent can continue to grow at about 2.2% per year.
Should I be concerned with rising rates?
On a side note, according to management and analysts, have said MUST can deal with the rising rate – DPU will drop by just 1.5% for every 1% increase in rates.
I don’t think interest rates will go anywhere near the 1980s double-digit numbers.
Even if that happens, the current 14% dividend yield is still way far above what many Singapore REITs’ dividend yield trades at today.
Final Thoughts — Would I Buy Manulife REIT Today?
In the short-term, at market cap just half of what its assets are worth, MUST shares make a quick speculative bet.
But longer term, I’ll only be a buyer of MUST for two things.
First, if MUST can improve their occupancy rate by locking in new, quality tenants, despite current weak leasing volume market.
Second, and I know it’s not that easy as it sound, is if MUST can fix its leverage. Otherwise, this REIT’s future growth is just soft as noodle.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan