Sunday, 15 May 2016

Manulife US REIT



Manulife US REIT is touting itself as the "first pure-play" US office REIT in Asia. They probably have learnt some important lessons from the prior failed attempt to list last year. They downsized the portfolio, lined up a list of cornerstone investors and seemed more able tell a better story this time.  Of course, timing wise, it is definitely better than last year.

Manulife US REIT is offering 396.569m units in total at $0.83 per Unit with about 45.787m units for the public. The IPO will close on 18 May 2016 at 12pm and starts trading on 20 May 2016 at 2pm. The exchange rate has been fixed at US$1:S$1.371 so investors applying for the shares via ATM will not have to worry about forex fluctuations on allocation. The market cap based on the IPO price will be around US$815.2m

There will be an over-allotment option of up to 28.149m units should there be good demand and post market stabilization thereafter. The first distribution will be paid on or before 30 March 2017 and semi-annually thereafter.

Sponsor

The Sponsor is part of the Manulife group, a leading Canada-based financial services group, with more than US$676b assets under management as of 31 Dec 2015. The parent company, Manulife Financial Corporation, is listed on various stock exchanges with a market cap of around C$37 billion. The Sponsor will hold for ~9.5% of the total no. of units in issue at the offering price.

Initial Portfolio


I will not spend too much time on the properties as much is written about them in the prospectus. I will basically copy and paste here if you are interested.


Structure


It is good to know that they have come up with structures that will ensure the distributions to investors will be tax-free subject to certain ownership conditions being met. 

They have also sought advanced ruling from IRAS to make sure there will not be withholding taxes on institutions investors, which probably explains why there is 'hot' demand from institutional investors. Individual investors will not be subjected to taxes.

According to the prospectus, in order to ensure that distributions remained tax free, there is a limit of 9.8% shareholding of any investor. If a shareholder acquire >9.8%, there is a "automatic forfeiture".

On one hand, you applaud the measures in place to ensure the REIT continues to qualify for tax incentive, on the other hand, it help the Sponsor "control" the REIT with just a small 9.5%. This is because there will be no one else able to take "control" and acquire the REIT. In fact, the Sponsor's shareholding will drop to 5% if over-allotment is exercised. I really wonder if there is true alignment of interest?


Profit forecast

This is the projected income for the next two years for your reference.

Cornerstone Investors

Cornerstone investors (Credit Suisse, DBS Bank, Fortress Capital, Lucile Holdings and Oman Investment Fund) will subscribe for 169.544m units.

Peer Valuations



The IPO is fairly priced at 1.06x Price to Book. Many of the listed peers are trading below book value and at yields that are close to Manulife REIT. Probably Frasers Commercial Trust offers a better value proposition if you are not seeking diversification.

What I like about the IPO
  • The Sponsor is reputable and highly experience in commercial real estate. If you would like an exposure to the US office REIT, Manulife will be a good name to start with. The Sponsor will have other properties in the pipeline which can be injected into this REIT
  • John Hancock Real Estate is an experienced and reputable US Asset and Property Manager
  • The properties are freehold, "Class A" locations and located in prime areas
  • WALE of around 5.7 years which provide visibility on the cash flows. It is also expected to have positive reversions in rentals renewals
  • High occupancy rate, indicating the properties are in good demand
  • Strong demand from institutions, resulting in the scale back to retail investors from 80:20 to 88:12. 
  • Allocation to long only funds preferred. See news report here.
  • Subject to certain ownership criteria where no single investor holds > 9.8% and where documentations are adequately furnished, distributions to investors will be tax free (which is typically not the case for US investments)
  • Distribution yield projected to grow from 6.6% to 7.1% without any financial engineering. This is probably "refreshing" as Singapore Office space is facing oversupply and downward pressures on rents



















Some of my concerns

  • The chart above is more "scary" than soothing? While it is trying to show you "out-performance", it also seemed to indicate that there are a lot of "spare capacity" in the market
  • Two of the three office buildings are pretty "old" and completed around 1991. There could be some refurbishment costs and higher opex that comes with older buildings. According to the IPO prospectus, these offices are recently refurbished.
  • Foreign currency exposure in USD. The units and distributions will be in USD. For retail investors, fluctuations in USD/SGD may be a concern, so you will need to see if this impacts you. 
  • Assuming the over-allotment is exercised, the Sponsor will control the REIT with only 5% shareholding. I am not sure if there is true alignment of interest between Sponsor and investors
  • The units are very widely distributed and whoever wants the shares will likely be fully allocated. 
  • IPO is fairly valued at 1.06x price to book while its peers are trading below book value.
My IPO ratings

This is a straightforward analysis - would you like to have a REIT exposure to US office space and currency exposure to USD. It is somewhat similar to question you ask yourself for REITs like Croesus or IREIT even though in those instances, the manager tried to hedge the JPY and EUR exposures. 

My own view is that if you are already into REITs for passive income and has exposure to local office space, then this is a good name to go with for further diversification. The yield also appear to be attractive enough for the institutional investors.  

I will give it a one chilli rating for reasons mentioned above. 

REITs are meant for longer term hold and not for flipping. You might suffer forex losses from the bid-ask spread through flipping. So flippers beware! ^_^

38 comments:

Anonymous said...

Will this Reit be traded in sgd or usd on sgx? Can't seem to find this info in the prospectus

Mr. IPO said...

Traded in USD

Cherub said...

@Mr IPO, what if my intention is not to flip, but to hold for long term, would you recommend for long term holding for this MUST?
Or skip and go for other REITS in the stock market instead...

thanks for your article =)

Choon Yeow said...

Could provide good diversification. Lease profile looks stable as the US market tend to have long lease vs S'pore mkt of around 3 years. Hence, visibility of earnings is good....moreover, one year forward yield is above 7%. The reit is named after sponsor...hence not too concerned about its shareholding be it at 9% or 5%....reputation risk consideration is key for them as sponsor.

Mr. IPO said...

Nothing is a "must" hold ^_^ personally I think you can find better value in other office REITs except local office REIT faces some headwinds on rental revisions. This one offers a different angle with exposure to USD and increasing yield. If you are bullish on USD:SGD, then this is one way to gain exposure to USD.

Mr. IPO said...

That is another way to look at it :)

Choon Yeow said...

Assets are also valued at below replacement cost.....which means supply issue in their respective areas are not too big a concern. A big contrast to S'pore mkt of around 4 million sq ft supply coming onstream in the enxt few years.

Anonymous said...

So who do we filled the w8 form to?

Isaac Cwy said...

How will brokerage charge for sales fee? And also need open usd acc? It's kind of confusing. Hope Mr ipo can enlighten

Isaac Cwy said...

How will the brokerage charge if want to sell it? Is it still the 25sgd min commission. Thanks

Mr. IPO said...

Normal brokerage apply. Same as the usual IPO except when you sell, the computation is done in USD then converted to SGD. No need to open a USD account but you will need to see what usdsgd rate the broker is converting for you

Anonymous said...

"The units are very widely distributed and whoever wants the shares will likely be fully allocated."

Meaning dog and cat also can get with high percentage kena?

Mr. IPO said...

If all the institutions get their allocation then who helped pushed the price up post listing...

Johnny said...

Dear Mr IPO,

For this IPO, will we need to sumbit w8 form?

Thanks in advance!

Mr. IPO said...

I don't think so! :)

Johnny said...

Dear Mr Ipo,

Thanks for the prompt reply !

But without the w8 form, will the DPU be affected or anything? sorry for noob question

Thanks again!

Mr. IPO said...

I believe the SGX will help with some of the queries and verifying the beneficiaries are Singapore tax residents etc

Anonymous said...

Hi,

A newbie question please ...If I apply for this through the bank ATM, will it shows up on my internet trading account (say UOB KayHian) ? Just wondering how to sell it if there is a need. Thanks !

Mr. IPO said...

It will be in your CDP account. Not your UOB trading account. You can sell nevertheless. Just make sure sell from Internet cash account.

Anonymous said...

Hi Mr IPO,

I saw from the prospectus "PROCEDURES FOR THE SUBMISSION OF U.S. TAX FORMS" Appendix I that seems to suggest W8 form is required.

Extracted:
"Boardroom Corporate & Advisory Services Pte. Ltd., the Unit Registrar of Manulife US REIT, will dispatch U.S. Tax Forms and certifications to each Unitholder that does not have valid documentation on file prior to Manulife US REIT making any Distributions to Unitholders. See Note 7 below regarding validity and resubmission of U.S. Tax Forms. U.S. Tax Forms may also be obtained from Manulife US REIT’s website at http://www.manulifeusreit.sg or from the U.S. Internal Revenue Service website at http://www.irs.gov.

Mr. IPO said...

Thanks for sharing. So troublesome?....

Anonymous said...


from the prospectus:

"U.S. Taxation
Unitholders need to comply with certain documentation requirements
in order to be exempted from withholding tax under the United States
Internal Revenue Code of 1986, as amended, including under the United
States Foreign Account Tax Compliance Act ("FATCA"). Please refer to
the section "Important Notice Regarding the Ownership of Units" on
page v of the Prospectus for more information."

Anonymous said...

Doesn't look very appealing.

How is this reit better than our current ones? Eg Lippo, frasers commercial, Soilbuild, Starhill, Croesus... Got 7-10% trailing dividend yield

Anonymous said...

Yup..w8 form valid for 3 years. Need to rem to renew every 3 years else dpu reduced without you knowing.

Anonymous said...

Maybe the troublesome w8 will become one of the reasons to your one chilli rating. Lol

Mr. IPO said...

Yah. too troublesome for retail investors. lol.

Mr. IPO said...

Yes.. I only compare against office REITs. Which is why I said if you are into office REITs and want diversification. :) having said that retail REITs also facing challenging economic environment

Anonymous said...

How does the w8 form work ? Do you need to fill that up before u apply for the reit ? Or thereafter ?

Subsequently, how do we know when to 'renew' it ? Thanks !

Anonymous said...

Fill up after u are allocated with the units as u not confirmed unitholders yet. Those ppl who buy direct from mkt will also need to fill up. See if boardroom advisory or the reit will send u the w8 form or not, else u need to go to the reit website to download the form and follow the instructions given.
w8 is valid for 3 years. Not sure if they send u the form to renew. If not d.i.y.

Lazy Cat said...

when will IPO results be out?

Anonymous said...

hello mr ipo,
what is your guess for opening price?
thanks.
cheers

Anonymous said...

Hi Mr. IPO Any write up on hyflux coming up?

Mr. IPO said...

IPO results out this evening.

Mr. IPO said...

My gut feel is 1-2 cents above issue price

Mr. IPO said...

Yes. Will do it over this weekend. Like my Facebook page if you want "instant" updates

leopard said...

Result is out if you applied from UOB bank.

Anonymous said...

Why you wrote in your blog's remarks that those that "the units are very widely distributed, whoever apply the shares are likely to be fully-alloted" and then now you wrote your gut feel is open 1-2 cents issue price??!!

Mr. IPO said...

Err 1-2 cents a lot ah? I am asked to guess the opening price... Cannot hazard a guess ah.. Lol.

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