Manulife has decided to plough ahead with its Singapore Reit flotation despite the extremely difficult market backdrop caused by Greece's potential exit from the Eurozone and China's collapsing A-share market.
The Canadian financial services group opened bookbuilding on Monday for an S$569 million ($426 million) IPO for Manulife US Reit after fixing the issue price for the 767.3 million units on offer at S$0.82. This represents a 2016 post tax dividend yield of 6.3%.
Joint bookrunners DBS and JP Morgan were able to tuck 23.56% of the offering away with six cornerstones comprising DBS, DBS on behalf of a number of private banking clients, Fortress Capital, Lucille Holdings, Nikko Asset Management and Oman Investment Fund.
In total it is believed that just under 50% of the entire deal was covered at the launch from cornerstone and anchor investors.
The remaining 513.622 million shares of the base offering have a 90.5% and 9.5% split between institutional and retail investors. There is also a greenshoe amounting to 6.7% of the base deal, or S$28 million.
Subject to the greenshoe being exercised, Manulife will retain a 9.5% stake. It will be subject to a six-month lock-up for 100% and a further six-month lock up for 50%.
The institutional order book will close on Friday, with the retail tranche running from July 7 to 13 ahead of scheduled listing on July 15.
The bookrunners will be hoping that a global flight to quality will aid a deal, which is not only having to contend with volatile market conditions but also a particularly poor showing by Singapore-listed office Reits.
Grexit threat spurs Treasuries
On the plus side, news that Greece has imposed capital controls led to a rally in US Treasuries on Monday. They closed the US trading day at 2.32%, 15bp tighter than the day before.
This makes Manulife US Reit much cheaper than it was on Friday following a week when US Treasuries rose 21.5bp. This means the deal is now providing a 398bp pick-up to US Treasuries, or 361bp over Singapore Treasuries, which remained flat on Monday.
Bankers also point out that Singapore's large cohort of private banking investors remain keen supporters of Singapore reits and should provide a key bedrock of support for the deal, which is unlikely to attract any momentum players.
"Investors can elect to receive their dividends in US or Singapore dollars," said one banker. "They can also see that this is coming at a steep discount to US listed office Reits, which are the key benchmark since this reit only has US office properties in it."
Comparables such as Douglas Emmett Inc and Hudson Pacific Properties Inc are trading on post tax 2016 yields of 4.58% and 4.326%, respectively. However, in line with the whole Reit sector, both stocks have been under selling pressure as investors start to price in the likelihood of US interest rate rises.
Douglas Emmett has fallen 12% since early April, while Hudson Pacific is down 15.9%. In Singapore, office Reits have also been the worst performing sector among local and regional reits.
Year-to-date they are down 8.1%, dragged down by CapitaCommercial Trust, which has fallen 11.1%, Suntec, which is down 11.7% and I-Reit, which is down 10.1%.
In comparison to the Singaporean office Reits, Manulife's yield does not look as enticing, although the group's roadshow presentation flags 5% growth in dividends per unit between 2015 and 2016.
CapitaCommercial Trust is currently offering the lowest yield at 5.7% for 2015 and 5.8% for 2016. At the other end of the scale, I-Reit is yielding 7.8% on a 2015 post tax basis.
Frasers Commercial Office Trust and OUE Commercial Reit sit in the middle of the group on 6.5% and 6.7% respectively for 2015, and 6.7% and 6.8% for 2016.
Investors will need to decide how much pressure they think the sector will continue to come under as US interest rate rises draw nearer. In its weekly Reits Pulsebeat published on Monday, RHB Securities argued that the sector should settle down.
"We think the average sector yields are likely trade range-bound at 5.9% to 6.5% and that the market has likely priced in a progressive and gradual lift off in interest rates starting in the middle of next year," it concluded.
A MUST buy?
What Manulife US Reit does offer Singapore is much-needed diversity since US commercial property assets are a glaring omission from a market that prides itself on being a global player. In its marketing presentation, Manulife tells investors that it is a MUST.
M stands for Manulife and its strong global brand name. U stands for the US and the Reit's ranking as Asia's first pure US office Reit.
S represents the offering's "superior property portfolio" and T equates to Manulife's experienced management team.
The group has a $13.2 billion global real-estate portfolio, of which just over 60% comprises office assets. It has indicated that it will continue to grow the prospective listed vehicle, although this seems likely to take the form of fresh equity rather than debt as its gearing stands at 37.6%, close to its self-imposed ceiling of about 40%.
Another key selling point it flags is the length of its debt portfolio, which has been locked-in for 10 years and makes it fairly immune to rate rises.
Standard & Poor's assigned the reit a BB rating with stable outlook on Monday. In its release the agency said that the Reit "will benefit from the expertise of its sponsor in managing commercial properties. In addition the shared brand name with the sponsor helps the Reit in the highly competitive US office market."
It said downward rating pressure would be exerted by a debt-funded acquisition strategy and upward momentum if the group can grow its "small" asset portfolio "while managing its lease expiry in 2017 (representing about 18% of the total lease expiry), such that its profits are stable."
The listed vehicle has an asset valuation of $723 million with a purchase price of $705 million. This comprises a portfolio of 1.464 million square feet with a weighted-average-lease-to-expiry of 5.1% years, 97.8% occupancy ratio and freehold status.