I spent the weekend reading the prospectus of Manulife Reit
as part of my case study to understand the different set up for Reits better and thought I’ll summarized my findings below.
You might recall in late July last year, Manulife was planning to launch their Reits IPO but pulled out towards the end due to poor market sentiments on the stock market and the upcoming interest rate hike.
Recently, they revive their IPO launch on the Singapore Exchange Mainboard to offer shareholders a chance to own a pure US office real estate play, aiming to raise US$519.2 million consisting of 396.6 million units at US$0.83 / share
In case you are interested, do watch out the indicative timetable below:
The Reit’s initial portfolio consists of 3 office properties located in Atlanta, Los Angeles and Irvine in Orange Country, California with a combined value of US$799 million. You can be sure the sponsor has many other offices that they will inject in over time. The portfolio has a WALE of 5.7 years which can be considered decently long on average standard.
The Reit started with a gearing of 38%, which sides on the slightly higher side of things, especially if the US starts to hike the interest rates upwards in time to come. Still, the net impact between the higher cost of borrowings versus the stronger USD would probably net off against one another.
The exciting part about these IPO is that investors are guaranteed
by the sponsor a DPU of 3.65 cents (from May to Dec 2016) and 5.475 cents in FY2017, which translate to a yield of 6.6% and 7.1% respectively
. This is not uncommon practice as we’ve seen other Reits in the past doing similar things on financial engineering such as income support and alike. This is to “stabilize” the performance of the assets at least in the first few years until investors are more educated on the Reits itself.
Premium to NAV
Many investors are put off when they pay a price that is premium to its NAV, especially for property related play like Reits. For this case, Manulife Reit is pricing itself at a price to book value of 1.06 while comparably if you look across the other office Reits listed on the exchange, you would find that only Ireit and MCT are trading at a premium while the others are trading at a discount.
There are good and bad about this and I am trying to look at it from another angle, similar to how I did for Ireit (vested).
Reits that are trading at a premium to their NAV are not necessarily bad investment and if the management are savy enough, they will be able to grow the portfolio of the assets much faster than those who are trading at a discount. You see, when the operational performance of the Reit is good and DPU is increasing, this is usually indicated in the increasing share price as a reflection of good performance. Reits manager would then be able to use this opportunity to acquire yield accretive assets by means of placement and grow the underlying AUM of the Reits, without compromising the DPU to unitholders because of dilution effects. A good Reit manager would strive to do and repeat this cycle.
If there is one thing that entices me, it is that the US cap rates for commercial properties are a few spread higher than the Singapore commercial properties, which is between the range of 3.5% to 4.0%. Interestingly, the graph tends to show a downtrend from 2009 onwards, but this can be interpreted in many ways, such as rising net asset value of a building, everything else constant.
The projections towards the next 2-3 years is an organic growth of rental reversion of up to 2.5% – 3.0% across its properties, where there are natural escalation in the lease negotiated. In terms of inorganic growth, the Reit is expected to acquire around 1 property a year and one of the criteria is yield accretive acquisitions, which many investors are in favor these days.
In order to look at this, one has to look at the way the manager’s fee structure are set up.
The manager’s fee structure is set up based on a base fee of 10% of total distributable income and performance fee of 25% of increase in DPU after FY2017. In other words, 7.1% levered yield is the base for benchmark towards what’s going to come after that.
When you see fee structures are being set up this way, they usually bode well for shareholders because then you don’t get managers who try to acquire for the sake of acquiring. One only has to look at the case study difference between MGCCT and Ascott Reit and you can see the difference in the overall performance over the years.
Cornerstone investors, which makes up currently of Credit Suisse AG, DBS Bank Ltd, Fortress Capital Asset Management, Lucille Holdings, and Oman Investment Fund, have agreed to enter a subscription arrangement of 169 million units. It is important to note that there are no lock-up period restrictions in respect of their unitholdings with exception to DBS Bank Ltd, which has agreed to a lock-up arrangement during the First Lock-Up period. In other words, the rest of the cornerstone investors can sell immediately on the open market when the trading commences.
One thing investors need to also take note is that any single investor can only take a 9.8% stake and not more. This is in order to meet one of the criteria for an investor to avoid an US withholding taxes rule.
This does not bodes well in my opinion because it would mean that with cornerstone investors included, not a single unitholder is able to make the decision that would sway in their favor. Things could get interesting if the performance of the Reit is abysmal.
Overall, I had a pretty good impression of the Reit and there are a few things that I like about how this Reit is being set up.
If you are one who would like a diversification into a US commercial properties, then this would provide a good avenue for you to park your money. For myself, my portfolio is rather heavy on commercial reits with Ireit and CCT, so I may decide to try a small bite on it via the ATM, but more for sake of case study in the future as well.
Looking at how the Oxley bonds and BGH Reits are well over-subscribed recently, I have no doubt that this will be well over-subscribed as well. I’ll try a few and see if I can get lucky.