Expanding growth

■ MUST to purchase 3 properties in Pheonix and Portland for US$201.6m
■ Acquisition boosts exposure to growth sectors, deal is DPU accretive.
■ Reiterate Add with a DDM-based TP of US$0.918.

Proposed purchase of 3 office park assets in Pheonix and Portland

MUST announced the proposed acquisition of a portfolio of three properties (Trio portfolio) in Pheonix and Portland, the US, for a total purchase price of US$201.6m or at a 2.3% discount to independent valuation. The properties at Diablo Technology Park (Diablo) and Park Place in Pheonix as well as Tanasbourne Commerce Center (Tanasbourne) in Portland have a total net lettable area (NLA) of 761,985 sq ft and is 93.4% occupied with a weighted average lease expiry (WALE) of 5.9 years. 100% of the leases in Trio have inbuilt rental escalations averaging 2.5% p.a. 47.5% of Trio tenants, by gross rental income, are in the tech/healthcare sectors. The top 10 tenants of Trio credit-rated/listed companies include Voya Services Co., Smart Embedding Computing, Conduent Commercial Solutions, Toyota Motor Credit Corp and Computershare Loan Services.

Acquisition boosts exposure to growth sectors

The Trio properties are office park assets located in high-growth sunbelt cities of Pheonix and Portland. This will expand MUST’s exposure to tech and healthcare sectors to 12.8% of enlarged portfolio by gross rental income as well as increase its exposure to growth markets such as Atlanta, Pheonix and Portland to 28.4% of enlarged AUM. Postacquisition, MUST’s occupancy and WALE will also improve to 91.3% and 5.2 years respectively. More importantly, not only are market rents in Pheonix and Portland projected by CoStar, a provider of commercial real estate information and analytics, to continue rising over the next 12 months, the current in-place rents of Trio properties are 9.3-14.7% below market. This should translate into positive reversions when leases are re-contracted, in our view.

The purchase to be funded by a combination of debt and equity

The total purchase consideration of US$207.7m will be funded through a combination of debt of US$127.7m and a private placement of 120.8m new units at an issue price of US$0.649-US$0.676/unit, to raise US$80m. There is also potential to increase the size of the equity fundraising by up to an additional 30.8m new units or US$20m. In terms of financial impact, management’s proforma estimates are for a 4.4% DPU accretion based on 1H21 financials while BV/unit dips slightly to US$0.70/unit post acquisition. The trust expects the pro forma post-acquisition gearing to be at 43.9%.

Reiterate Add

Reiterate Add. Our DDM-based TP (cost of equity 7.56%, terminal growth 1%) remains at US$0.918, pending the completion of the acquisition and fund raising exercise. At a projected FY21F dividend yield of 7.7%, we believe much of the slower near-term growth has been priced in. Potential re-rating catalysts: better-than-expected rental reversions and faster-than-expected ramp up in portfolio occupancy. Key downside risk: protracted slowdown in the US economy which could dampen appetite for office space.