Manulife started pre-marketing on Tuesday for an initial public offering in Singapore of its US office real estate investment trust, having failed at the first attempt just nine months ago.
Bankers familiar with the situation suggest the deal could raise around $500 million, slightly more than the S$569 million ($426 million) targeted last time.
Manulife has picked Singapore to monetise the assets in the hopes of getting stronger attraction since Manulife US Reit, as the trust is officially named, will be the first pure-play US office Reit to be listed in Asia.
The Canadian financial services group is aiming for a May 20 listing and is hoping that a more benign market backdrop entices sufficient demand for the float this time round.
When the group made its first attempt to list the Reit in July last year stock markets in Asia were in the early stages of a sharp correction as Greece flirted with a potential Eurozone exit and Chinese share prices tumbled.
Global Reit markets were also weighed down by expectations of an imminent US interest rate hike, which might have made competing yield assets more attractive and raised the cost of real estate investment. Within four months, the SGX S-REIT Index was down 20% from its April peak.
Against that backdrop Manulife failed to solicit enough demand to cover the IPO despite having the order book half-filled at launch.
But market conditions are now more favourable with the removal of the US monetary policy overhang and a growing sense that further rate hikes are likely to be put back. The stock market is also less volatile, with the SGX S-REIT slowly recovering from the four-year low recorded in late January and adding 10% since then to close at 1,125 points on Tuesday.
New portfolio mix
At the last listing attempt, Manulife US Reit’s portfolio included three Grade-A office buildings in Washington DC, Los Angeles, and Irvine, Orange County.
In the revived deal Manulife has removed M Street in Washington DC, a 242,760 square-feet office building that accounted for 19% of the old portfolio’s net asset value and replaced it with a 28-storey Grade-A office building at 1100 Peachtree Street in Atlanta, Georgia.
Manulife acquired 1100 Peachtree Street from two US real estate firms for $154 million in 2007. It has a net leasable area of 553,778 square feet.
Manulife will keep the other two assets in the new portfolio. They are Michelson in Orange Country and Figueroa in Los Angeles, which will account for 30% and 39% of the new portfolio’s NLA and 40.5% and 37% of its NAV, respectively.
The inclusion of the Peachtree will effectively enlarge the new portfolio’s total NLA by 23% to 1.8 million square feet. Its NAV will also increase by 10.5% to $799 million, based on valuation estimates by Colliers International.
Valuation
Early indications suggest the new deal is likely to offer an annualised dividend yield of 6.5% to 7.0% for 2017. That represents a pickup of at least 20 basis points to the last deal, which was offered at a fixed price of S$0.82 per investment unit to yield 6.3% on a post-tax basis.
The deal looks comparatively cheaper than last time too, with benchmark 10-year US Treasury yields quoted at 1.78% on Tuesday, down 64bp on July last year. Annualised returns for 10-year Singapore government bonds have also declined to 1.99% from 2.73% nine months ago.
On that basis, the new IPO could provide investors with a yield pickup of more than 100bp over the last deal, depending on where final pricing lands.
Manulife will be hoping the boost in dividend returns attracts additional interest to private banking demand, which accounted for the bulk of the order book last time around.
The deal might appeal to US yield-play and global Reit investors since it offers a return that is significantly higher than the average 4.38% yield for MSCI US Reit Index constituents.
The focus nonetheless appears to be on Asian investors, even though the potential yield on Manulife US Reit is pretty much in line with the 7.04% yield of the SGX S-REIT Index. All the pre-marketing sessions will be held in Hong Kong and Singapore, according to a source familiar with the situation.
While the group has yet to come up with the schedule for the management roadshow, it is unlikely to include any trip in the US, the same source said.
A second source familiar with the situation said cornerstone investors could potentially share a bigger slice of the IPO and are expected to take up 40% to 50% of the deal.
In the last deal, six cornerstone investors were lined up to take up 23.56% of the Manulife US Reit IPO. These were DBS, DBS on behalf of a number of private banking clients, Fortress Capital, Lucille Holdings, Nikko Asset Management, and Oman Investment Fund.
Some of the cornerstone investors in the previous deal have also indicated their interest to participate again, subject to internal approval, the second source said.
Manulife has also engaged new banks to help carry the deal to the finishing line.
DBS and JP Morgan were joint bookrunners on the previous deal but the latter has now been dropped from the syndicate and replaced by CICC, Credit Suisse and Deutsche Bank.
Pre-marketing of the IPO will run through April 29, followed by bookbuilding and management roadshow from May 3 to May 11.
Additional reporting by Jackie Horne
