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! ^_^