• Cut to NEUTRAL from Trading Buy, unchanged USD0.12 TP implies 4% downside. Manulife US REIT’s divestment price of Capitol was below expectations, but the sale will lend much-needed liquidity and raises the odds of a successful restructuring. US office conditions are slowly but steadily improving both on the leasing and financing fronts, but with MUST’s share price rebounding c.94% (over the last three months), near-term positives are mostly priced in. Potential upside may come if further divestments are at closer to book value, while the US economy faltering would be a key risk.

• Divestment aimed at generating liqudity over pricing. Capitol, located at 400 Capitol Mall, Sacramento, will be divested to a local property player for USD117m, in an all-cash transaction. The asset was purchased for USD199m (Sep 2019), and was valued at USD158m as at Dec 2023 and USD118m as at 1 Sep 2024. The transaction reflects discounts of 41%, 26% and 1% to the purchase price and the latest two valuations. Capitol is currently part of MUST’s Tranche 2 stable of assets in its portfolio vs Tranche 1 (Figure 1), which are identified as more challenging operational assets or markets. Management, however, noted that the divestment was done after taking into account all factors – in particular, the lack of debt financing and institutional buyer pool. Moving ahead, it remains open to all possible options to build up further liquidity for the REIT to meet its target of USD329m in cumulative asset disposals by mid-2025, as per the master restructuring agreement the REIT manager signed with lenders in Nov 2023. In light of the stabilising market conditions, we expect commercial market transaction liquidity to improve and management’s focus to shift more towards asset value maximisation – with asset selling prices being much closer to or possibly above valuations in the future.

• Proceeds to be used to repay FY25 debt of USD131m, with the remainder coming from internal cash. The repayment is expected to result in ~42bps in savings of weighted average interest costs to 4.16% pa (vs 4.58% as at 1H24). With this, it will have no debt repayments until 2026, thereby providing a longer runway for the REIT. Pro forma NAV (1H) after the completion of this transaction will be at USD0.31, and the transaction will result in a DPU (1H) dilution of 6.4%. MUST’s aggregate leverage will be lowered to 54.2% post sale and debt repaymet, from 56.3%.

• We have adjusted FY25-26 distributable income by -14% and -11%, after factoring in asset dispositions by the end of the year. Our TP is pegged to 0.35x FY24F book value, and has a parity ESG premium/discount imputed, as MUST’s ESG score is in line with the country median.

Source: RHB Research - 1 Oct 2024