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5 Things Investors Should Know About Manulife US REIT’s Upcoming IPO

There’s been a dearth of initial public offerings (IPOs) this year for local bourse operator Singapore Exchange Limited (SGX: S68). So, news of Manulife US REIT’s intention to list here in Singapore can be seen as a breath of fresh air for Singapore Exchange.

Here are five key things investors may want to know about Manulife US REIT’s upcoming IPO.

1. The business

Manulife US REIT will be the first pure-play US office real estate investment trust to be listed in Asia. The REIT’s sponsor is Manulife, a Canada-based financial services group whose insurance services Singaporeans may be familiar with.

Manulife’s real estate portfolio is overseen by Manulife Real Estate, which has US$15 billion in real estate assets around the globe as of 31 December 2015. US$8 billion of that sum is located in US.

According to Manulife US REIT’s IPO prospectus, its portfolio at listing will be made up of three freehold, Class A or Trophy quality office properties which are strategically located across prime areas of key U.S. cities. These properties are the Figueroa (located in Los Angeles, California), Michelson (Irvine, California), and Peachtree (Atlanta, Georgia).

The IPO portfolio has an aggregate net lettable area of approximately 1.8 million square feet and an occupancy rate of 96.5% as at 31 December 2015.

2. The nitty-gritty

Manulife US REIT will be selling 396.6 million units of itself at US$0.83 per unit, which works to around S$1.13. Of the 396.6 million new units to be issued, 350.8 million units are earmarked for placements to investors outside of the U.S. while the remaining 45.8 million units will be available for the general public in Singapore.

For context, the REIT will have a total unit count of 625.5 million upon listing, giving it a market capitalisation of nearly US$520 million (based on the offering price and total unit count).

The REIT’s public offer will close at 12 noon on 18 May 2016 and its units will start trading at 2pm on 20 May 2016.

3. Operational highlights

As previously mentioned, Manulife US REIT will be an owner of three prime commercial buildings in the U.S. when it lists.  These properties house 74 tenants that come from various sectors such as legal services, financial services, technology, media and telecommunications, and health care.

The three properties’ overall occupancy rate of 96.5% is also far above the average occupancy rate of 85.3% for the office market in Los Angeles, Orange County and Atlanta.

The REIT believes that it can benefit from the recovery of the US economy. Moreover, the REIT also thinks it has a favourable industry outlook that’s underpinned by tight office supply and growing demand.

Here are a few other points worth noting for Manulife US REIT.

First, its US properties have a “long” WALE (weighted average lease to expiry) of 5.7 years by net lettable area. For some perspective, CapitaLand Commercial Trust (SGX: C61U), an owner of office properties in Singapore, has a WALE of 7.5 years as of 31 December 2015.

Second, as of end-2015, around 99.1% of Manulife REIT’s existing leases by net lettable area have some form of built-in rental escalations.

Third, Manulife REIT’s sponsor has a long history in the real estate business with over 70 years of experience.

Fourth, upon listing, Manulife US REIT is expected to have an aggregate leverage ratio of 36.8%. As a reminder, a REIT’s aggregate leverage in Singapore can’t exceed 45%.

Fifth, the REIT has a net asset value of US$0.78 per unit as of end-2015, thus giving its units a price-to-book ratio of just over 1 at the listing price.

4. Manager fees

Investing maestro Charlie Munger once said the following to drive home the importance of incentives when it comes to influencing human behaviour:

“Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.”

Manulife US REIT seems to have incentives which show some alignment with unitholders’ interests.

The REIT manager’s base fee each year is pegged at 10% of the REIT’s distributable income in that year.

Meanwhile, the manager can also receive performance fees each year that amounts to “25.0% per annum of the difference in DPU [distribution per unit] in a financial year with the DPU in the preceding financial year… multiplied by the weighted average number of Units in issue for such financial year.” In other words, the REIT manager’s performance fee can only grow if the REIT’s DPU grows.

5. Distributions

Distributions are an important thing to consider with REITs. In Manulife US REIT’s case, here are what its forecasted distributions look like:

Period Yield based on list price of US$0.83 (DPU)
Forecast Period 2016 (eight months ending 31 December 2016) Annualised yield of 6.6% (3.65 US cents)
Projection Year 2017 7.1% (5.87 US cents)

Source: Manulife US REIT’s preliminary prospectus

For some context, CapitaLand Commercial Trust, has an annualised yield of 6.3% at its current price of S$1.385 thanks to its quarterly distribution of 2.19 Singapore cents per unit in the first-quarter of 2016.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.