Increased Exposure To High-Growth Tech And Healthcare Sectors

MUST has entered into purchase agreements to acquire three properties in Phoenix, Arizona and Portland, Oregon. The trio of acquisitions reinforces MUST’s plans to increase exposure to high-growth tech and healthcare sectors. The DPU-accretive acquisitions would be funded via a private placement and existing loan facilities. Maintain BUY with an attractive yield of 8.1%. Target price: US$0.87 (US$0.84 previously).

WHAT’S NEW

Asset acquisition. Manulife US REIT (MUST) recently announced on 30 Nov 21 that it will acquire three properties in high-growth Sunbelt/magnet states for a total purchase consideration of US$201.6m excluding transaction costs. Two of the properties (Diablo and Park Place) are located in the suburbs of Phoenix (Tempe and Chandler) and one property (Tanasbourne) in Hillsboro, Portland. The assets are located in attractive locations with lower cost of business, large catchment of tech and healthcare companies, close proximity to highly-skilled talent pools and robust population growth. MUST expects the acquisition to be completed by Dec 21. The acquisitions would be DPU accretive to unitholders.

Enhance portfolio resilience. The trio of properties has a weighted average occupancy rate of 93.4% and a 5.9-year weighted average lease expiry (WALE). Management expects Diablo’s occupancy of 85.7% to improve given its close proximity to highly-skilled talent pools and Tempe’s lower costs of doing business. Post-acquisition, MUST’s portfolio occupancy would rise to 91.3% (90.9%) and WALE to 5.2 years (5.1 years). The trio has no significant near-term lease expiries with only 2.3% of leases by gross rental income (GRI) expiring in 2023.

2.5% built-in rental escalation provides clear organic growth. All three properties have an average annual escalation of 2.5% built into its leases. This brings average annual escalation for the enlarged portfolio closer to 2.2%. Additionally, the trio is under-rented by 9.3-14.7%. It is likely that we can expect strong rental reversions of about 12.3% when leases expire.

High-quality and resilient tenant mix. The top 10 tenants from the three properties make up 95.5% of NLA and have an average WALE of 6.0 years. These 10 tenants consist of credit-rated/listed companies that are from the tech, finance and healthcare sectors. Post acquisition, MUST’s portfolio would increase its exposure to the tech/healthcare sectors by 34.7% through GRI and 35.2% to growth markets by AUM, making MUST’s overall portfolio most resilient and diversified.

STOCK IMPACT

• Private placement and higher gearing. To fund for the acquisitions, MUST has completed a private placement at an issue price of US$0.649/new unit, totalling gross proceeds of close to US$100.0m. The total number of units in issue would increase by 154.1m new units, a 9.6% increase overall. MUST will also tap on existing loan facilities for the remaining US107.7m, increasing its pro-forma 1H21 gearing ratio to 43.9% (42.1%) post-acquisition.

• Yield-accretive. The acquisition is expected to increase pro-forma 1H21 DPU by 4.4% and slightly decrease 1H21 NAV to US$0.70/unit (US$0.71/unit).

EARNINGS REVISION/RISK

• We adjust 2021-23 DPU forecast to incorporate the new acquisitions. We decrease our 2021 DPU by 3.9% due to a larger unit base from the private placement and increase our 2022-23 DPU forecasts by 3.4 and 4.1% respectively due to contributions from the three acquisitions.

VALUATION/RECOMMENDATION

• Maintain BUY and with a higher target price of US$0.87/unit (US$0.84/unit previously), based on DDM (required rate of return: 8.0% terminal growth: 1.0%).

SHARE PRICE CATALYST

• Positive newsflow on office leasing activity.
• Return to office in the US.