• Maintain BUY and USD0.43 TP, 61% upside and 16% yield. Media reports have identified Mirae Asset (Mirae) as the preferred bidder to buy Manulife US REIT’s manager along with a stake in the REIT. The outcome comes as a part of strategic review and – if it materialises – will be a positive catalyst in our view, as we believe the deal addresses key challenges faced by the REIT, ie gearing and future growth trajectories.

• Mirae is the preferred candidate over four other bidders, according to South Korea’s business newspaper Pulse. The article names Mirae to purchase MUST’s REIT manager along with an undisclosed stake in the REIT for a total sum of KRW200bn (USD153.6m). Management confirmed in an announcement on the SGX that it is holding discussions but no agreement has been signed yet. It also confirmed that the potential deal involves purchase of REIT manager and issuance of new units. The news comes after a challenging last year for MUST, with declines seen in both portfolio occupancy and asset value.

• Potential bid a likely panacea for the REIT’s issues. Based on our calculations, by assuming an 8x multiple over its management fees in 2022, we derive REIT manager’s valuation of c.USD70m (see Figure 1 for sensitivity table). This leaves balance proceeds of USD83m for the issuance of new units – for simplicity’s sake, we have not factored in transaction costs. As per US REIT regulations, to be exempted from withholding taxes, no single investor can hold more than a 9.8% stake, although some REITs overcame this hurdle by using multiple unrelated funds. We assume Mirae will subscribe for the maximum 9.8% stake or c.174m new units. This works out to a new issuance share price of USD0.48, ie a 13% discount to its NAV, based on above proceeds. Such a transaction will result in pro forma (FY22) DPU and NAV dilutions of 9% and 1%. More importantly, assuming debt repayment by utilising entire proceeds will bring down gearing to just below 45%, ie the official threshold limit for REITs with an interest coverage ratio or ICR below 2.5x. MUST’s latest ICR stands at 3.1x.

• Mirae is a leading South Korean asset manager with a presence in 13 countries and assets under management of >USD198bn as at end Dec 2022. It provides clients with asset and investment management services in fully diversified asset classes like equities, bonds, exchange-traded funds, real estate, infrastructure, and private equities. If the purchase is successful, we think Mirae could use its expertise, networks, and US real estate assets to diversify and strengthen MUST’s profile across asset classes and geographies in the mid to long term.

• No changes to our earnings. MUST has a high ESG score of 3.3 (out of 4.0). As such, we apply a 6% premium to our TP.

Source: RHB Securities Research - 17 Mar 2023