Manulife returns with bigger S-Reit IPO

Canadian financial services group decided to press ahead with the listing of its US office portfolio in Singapore and is hoping for a second-time success.
1100 Peachtree Street
1100 Peachtree Street

For the second time in less than a year Manulife has launched an initial public offering of its US office real estate investment trust in Singapore, only this time it is targeting more money.

Having failed to list the assets last July as global stock markets tumbled, the Canadian financial services group is now set fair to raise as much as $470 million, over 10% more than last time.

Chastened by its experience 10 months ago, Manulife has secured pre-launch commitments totaling 80% of the Manulife US Reit IPO, a source familiar with the situation told FinanceAsia.

They include roughly $139 million-worth of orders from six cornerstone investors, namely DBS, DBS (on behalf of private banking clients), Fortress Capital, Lucille Holdings, Oman Investment Fund, and Credit Suisse (on behalf of private banking clients).

The cornerstone lineup is the same as before except for Credit Suisse, which has replaced Nikko Asset Management. 

Manulife has also tried to eliminate the foreign exchange risk, seeing as the rental income generated by Manulife US Reit's assets is in US dollars. This time the fundraising and Reit pricing will be done in US dollars rather than in Singapore dollars, as was the case in July 2015.
 
"The revision was done on the back of investors' feedback to better align the listing currency with the currency of operations, and in light of the anticipated appreciation in the US dollar backed by continued strength in the [US] economy," according to a sales note seen by FinanceAsia.
 
What is unchanged is the dividend distribution policy, which remains the choice of unit holders and is paid in either US or Singapore dollars.

Valuation

The terms for the new deal include 566 million investment units offered at an indicative range of $0.82 to $0.83 apiece. There is also a greenshoe of 28.2 million investment units, or 7.1% of the base offering.

Excluding the greenshoe Manulife US Reit will have a market capitalisation of $513 million to $519 million, depending on where final pricing lands.

On a post-tax basis, that equates to a dividend yield ranging from 6.6% to 6.7% in 2016 and 7.1% to 7.2% in 2017, assuming a full payout of estimated net income of $25.7 million this year and $34.2 million next year.

From a yield perspective that offers a very generous return compared with comparable US office property trusts such as Douglas Emmett and Highwoods Properties, which are yielding 2.8% and 3.7%, respectively, for the 2016 financial year. 

Manulife US Reit also offers a spread of 440 to 450 basis points over US Treasuries, which were indicated at 1.8% in Asian hours on Tuesday.  

However, in view of accounting differences between Singapore and the US, alternative valuation methods are possibly warranted. While S-Reits report earnings on a net cash basis, US Reits are required to make adjustments in their income statements for the depreciation and amortisation of non-cash items. That generates what is commonly known as adjusted funds for operations, or AFFO.

According to syndicate estimates, Manulife US Reit will yield 4.9% to 5% for 2016 and 5.3% to 5.4% for 2017, which still represents a pickup on Douglas Emmett and Highwoods Properties, which yield 4.3% and 4.6%, respectively, for this year on an AFFO basis.

Portfolio

Manulife US Reit's portfolio includes three Grade-A office buildings, comprising Michelson in Orange Country, Figueroa in Los Angeles, and 1100 Peachtree Street in Atlanta, Georgia.

The portfolio's total aggregate net leasable area is 1.78 million square feet and the net asset value is $799 million based on valuation estimates by Colliers International. That means the trust will be listing at a discount of around 35% to its net asset value, compared with around 11% on average for US-listed office Reits, according to syndicate estimates.

Further down the line Manulife US Reit will also be able to access the parent's $13.2 billion global property portfolio as the Canadian financial services group has indicated that it will continue to expand the listed entity's portfolio.

One potential acquisition is M Street in Washington DC, a 242,760 square-feet office building which was part of the Reit's portfolio at the first listing attempt. It was replaced by 1100 Peachtree Street in the new deal.

With leverage debt ratio standing at 37.7%, any acquisition will likely be financed through fresh equity issuance since the Reit could face a credit rating downgrade if the ratio exceeds 40%, according to Standard & Poor's.

DBSCICCCredit Suisse, and Deutsche Bank are joint bookrunners on the revived IPO.

Bookbuilding and management roadshow is expected to run through May 11 with a target listing date on May 20.

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