• Keep BUY and USD0.40 TP, 126% upside and 23% yield. We think the Phipps Tower (Phipps) disposal to Manulife US REIT’s sponsor is another positive step, demonstrating much-awaited sponsor commitment and brightening its longer-term prospects amid a very challenging near-term US office outlook. With the lapsing of the Mirae Asset Global Investments’ (Mirae) exclusivity period, the likely next steps for the REIT are further asset disposals and bringing in longer-term value-add strategic partners.

• Phipps in Atlanta (2010 built) is the second sale in two months to MUST’s sponsor (purchased from the sponsor in 2018 for USD205m). Phipps was valued at USD210m at end Dec 2022. The purchase price is likely to be at the average of the latest two valuations (yet to be announced) with the deal’s finalisation slated by end June. The sale is still subject to unitholders’ approvals. Note: Child apparel retailer William Carter – the largest tenant in Phipps and MUST’s portfolio (c.5.7% of FY22 income) – downsized its space by 25% in 1Q23 but signed a longer lease (till 2035) on the 209k sq ft balance at higher rent rates (+18%). While this is one of the better asset in MUST’s portfolio, we think the sale will likely result in weaker overall metrics. The downside of potential sales of weaker assets like Figueroa in the current market is that valuations are extremely stressed and may not fully reflect the longer-term potential once the market bottoms and recovers.

• Gearing to fall to c.43%, rights issue still possible. Taking in the recent rate hikes, tenant downsizing at Phipps, and outlook, we estimate the tower’s sale to fetch c.USD190-200m. With the April sale of Tanasbourne at USD33.5m, the total estimated proceeds of c.USD224-234m will likely be used to pare debt and lower gearing to a more comfortable c.43%. This may not be fully sufficient, as likely further asset write-downs at end 2023 will bring gearing above the critical 45% threshold. Hence, we believe MUST needs further asset disposals or strategic equity injection from long-term partners. A rights issue is still a possibility but, with the Phipps sale, MUST has breathing space, allowing it to wait for conditions to stabilise.

• The lapse of the Mirae exclusivity period was not totally surprising, considering the recent heightened scrutiny on its intentions and roadblocks that such a transaction faced amid the sharp drop in MUST’s share price. While it remains open to ongoing discussions with Mirae, it is also considering proposals from others as part of an ongoing strategic review. Pending further details, we make no changes to our earnings and TP.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage and assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for details. As MUST’s score is two notches above country median, we apply 4% ESG premium to our TP.

Source: RHB Research -31 May 2023