Friday, September 20, 2019

Manulife US Reit acquisition of 400 Capitol

The recent announcement seems OK.  Not good, not bad. just OK.

It is a Class A office building in Sacremto downtown (CBD), possibly a "trophy", being the "tallest building in Sacramento...forming an integral part of the city’s skyline. The Property is widely considered the premier building in the market and is downtown Sacramento’s address of choice for premier law, financial service, accounting, and professional service firms."

Average of 2.3% rental escalations per annum.

Committed occupancy is 94.9%, though the small print says that excludes one tenant that has exited since then.

Manulife says that rentals have space to move up:

The 2019 Q2 Cushmand and Wakefield report that I found gives Downtown Sacremto's asking rent as  $3.18 (p3), which would be $38.16 per year.  Maybe the newer report has higher rent.

One of their major tenants is a bit dodgy:

WeWork signed the lease in 2019 Q2 (See p3).  I do not know if the lease length is a long one, adding to the 5.9 year WALE.

The property had a lower occupancy rate of 84% in 2018 - this was before the WeWork lease.  Manulife gave a proforma calculation of how it this acquisition would have affected their results if it had been done in 2018:

Almost no change.  So if WeWork stopped paying rent tomorrow, it is likely that DPU after the acquisition would be unchanged from before it.

Longer term, I think its a good property and I'm surprised they were able to buy another CBD property, rather than suburban.  Shorter term, I don't think its as good as they make it out to be. Vacancies were higher last year, and with WeWork as a tennant, the numbers might not reflect reality.   Perhaps the seller leased to WeWork to increase the valuation before selling.  And perhaps Manulife rushed a bit in order to grow to be included in the Nareit:

Its a valid business strategy to grow bigger to be included in the Index.  Size matters for REITs, and inclusion in the index will boot their valuation, reduce their cost of capital, allowing them to acquire more.

I think Manulife REIT is still decent and, and one of the few SGX-listed REITS not overvalued.  I will be subscribing for the preferential shares, and will continue acquiring it.

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