News Analysis: No surprises on valuation adjustments
- MUST portfolio will see a further 8% decline at Dec23 and expects to report a loss for FY23 due to fair value losses; no cash-flow impact but gearing is expected to be at 57% post the execution of phase 1 of debt restructuring plan.
- Debt restructuring plan were put in placed in anticipation of the valuation update; unitholders approved and subsequently executed in Dec23.
- A read-through to potential precursor on its peers; gearing of KORE and PRIME is estimated to increase to 43% and 49% respectively assuming a 10% asset value adjustment.
- Maintain HOLD; TP of US$0.10.
What’s New
MUST portfolio saw a further 8% decline at year-end Dec23; expect to report a loss for FY23 due to fair value losses but no impact on cash flow; ongoing execution of debt restructuring plan. MUST announced a further 8% decline in portfolio valuation following year-end valuation update. The decline were due to higher discount rate, terminal cap rate, vacancy levels and lower market rents in some assets. In addition, weak US office market and slowdown in leasing activities continue to weigh down on the asset values. The 5 assets which recorded highest decline were Figueroa (-20%), Plaza (-13.6%), Penn (-12.9%), Diablo (-11.3%) and Exchange (-9.3%). Figueroa continue to record the highest valuation decline of 20% from Jun23 valuation and c.60% decline vs Dec19. Excluding Figueroa, the portfolio valuation decline would have been 13%. As a result of the fair value losses, MUST expect to report a loss for FY2023 but there are no impact on cash flow basis as fair value losses are non-cash items. MUST is expected to be able to pay its interest payments and expenses. Following from obtaining unitholders approval at EGM on the debt restructuring plan, in Dec23, MUST had divested Park Place to its Sponsor, obtained Sponsor-Lender loan and repaid c.US$235m in debt to the Lender, in line with the Debt Restructuring Plan. Based on proforma, gearing would have reduced to 54%. Following the asset valuation decline, gearing would creep up to 58%. The unencumbered gearing ratio is estimated to be 63% post the asset valuation update, within the temporary relaxed financial covenants of 80%. MUST is expected to repay an additional US$50m by 31 Mar 2024. Gearing and unencumbered gearing ratio is expected to decline to 57% and 60% respectively.
Our Views
MUST debt restructuring plan were put in placed in anticipation of the valuation update; do not expect unexpected impact to add to MUST’s woes but a read-through to its peers might see higher risks on PRIME. MUST’s debt restructuring plan was fortunately being approved and executed at the end of 2023, in anticipation of the year-end asset valuation update and adjustments. We do not foresee any unexpected impact that would add to MUST’s woes for now and the debt restructuring plan will “buy” MUST 2 years to resolve its debt crisis, though with costs. While asset valuation decline was not totally unexpected for MUST, it is a read-through or a precursor of potential asset valuation decline expected for its peers, PRIME and KORE. On a y-o-y, MUST’s portfolio (excluding divested assets) fell 22%. Given PRIME and KORE did not conduct a mid-year valuation update, a ballpark guesstimate of asset valuation could be between 10% to 15%. A 10% decline in asset values will see KORE’s gearing increase to c.43% while PRIME would be c.49%.