Manulife US REIT's 400 Capitol buy could boost DPU by 2.3%: analyst

The fundraising conducted to finance the sale is expected to boost market cap by US$140m.

Manulife US REIT’s (MUST) latest acquisition of 400 Capitol in California is said to boost the REIT’s distribution per unit (DPU) to 2.3% and may consistently delivery of 2% compound annual growth rate (CAGR) of DPU over the FY2019-21 period, according to a note by DBS Research.

Furthermore, the fundraising conducted to finance the said acquisition is expected to boost market cap by US$140m.

“MUST delivered two acquisitions in 2019, ahead of investors’ expectations (in line with ours) as it continues to look to grow inorganically, providing investors with improved diversity in earnings, exposure and a stronger growth profile,” said Derek Tan, an analyst at DBS Research.

400 Capitol is a 29-storey top Class A office building with an NLA of 500,662 sqft and has an occupancy rate of 94.9%. Its purchase prices was US$198.8m at US$397 psf, which Tan noted is below replacement cost of US$700 psf and is also below valuation of US$200.5m. Its implied cap of 7.2% is also above MUST trading yield.

In addition, it's in-place rent of US$39.3 psf/year is 11.5% below the potential asking rents of US$43.8 psf, which implies the ability to yield up the property in the longer term as the leases are rolled over in the coming years.

“Given that we had previously priced in a US$$200m acquisition; US $140m via fund-raising, our estimates are revised up by c.<1.0% given that MUST delivers an acquisition with a higher yield (7.2% vs 6.5% estimate),” Tan added.

400 Capitol is expected to offer its investors an “interesting mix” of high yield and growth. However, the report noted that this could be offset by lower occupancy, slower-than-expected recovery of office rentals in the US and the impact from changes in tax laws resulting in higher taxes paid.

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