Manulife US REIT

[CY09]

While Manulife gives a good cryptic explanation to why its sales has not been up to pace.

Investors have to note that under MUST sales agreement, it must sell (i) US$230 million by end 2024 and (ii) US$98.7 million additional by mid June 2025

There are penalties involved where if MUST does not meet (i), its loan interest will rise from 7.25% to 8% and (b) an penalty of 1% of US$230 million minus the sales proceed. MUST has not sold a single property and the penalty nears with each passing day

[weijian]

These insiders may probably be right with the assessment that "next 3 year will have wonderful opportunities not seen in the last 30years". But the opportunity is probably only reserved for those who don't need rates normalcy or in other words, are able to take advantage of rates abnormalcy. 

So, these wonderful opportunities will probably be built on the likes of Manulife REIT.

MINUTES OF ANNUAL GENERAL MEETING

The next 3-year period will have some wonderful investment opportunities that John and I probably have not seen in the last 30 years including the Great Financial Crisis. That will also allow us to grow in asset value, because, to Mushtaque’s point, at some point, there will be some return to normalcy.

While we will always focus on the 10-year long-term part of the curve, there is a 3-year and 5-year floating rate financing, and also some fixed rate financing at the 5-year point. When we return to the normal interest rate structure where it is no longer the flatter inverse, the shorter end of the curve will be lower than where it is today relative to the 10-year. We hope that the return to normalcy for the interest rate structure will allow us to access shorter term financing as opposed to longer term financing. There is light at the end of the tunnel, but we do need a return to normalcy. In this regard, we had reached an agreement with the lenders for a 2-year moratorium.

https://links.sgx.com/FileOpen/Manulife%...eID=803483

[CY09]

Weijian you are right MUST won't capitalized on it. Sun belt property are in demand because they are of submarket with stronger demand due to low state corporate tax

Despite prime having done a divestment on an old Sunbelt property to ensure it lives, MUST is still struggling to sell. MUST could sell it's 3 sun belt property and it will be safe. However it will be left with very old properties that need high CAPEX.

About the topic of valuation, it is inevitable that another round of downward valuation will happen. MUST Figueroa property should be overvalued because a nearby office block was sold at a much lower price and has higher NLA and retail zoning to MUST's

Among the 3 US REITs, MUST has the second oldest property portfolio and the least ideal property locations. This means it needs to pay down debt and give capex to it's existing office building otherwise tenancy will fall. End state, it is likely the entire tranche 1 property will be sold and 01 of tranche 2.

Future wise, I do think MUST will sell down at least 01 tranche 1 building before may 2025 to pay off the first tranche of debt. After which, MUST may opt to take the penalty in it's financial covenant by not completing the required sale amount. But it will damage it's cash flow. It could be a strategy of waiting for the commercial real estate to rebound by paying an even more expensive debt. Please see my earlier post on the effects of the financial penalty

[CY09]

https://links.sgx.com/FileOpen/Manulife_...eID=814174

MUST has released its 1H 2024 results.

Occupancy is slightly down with Figureoa decline in vacancy largely to blame. Los Angeles seems to be the place where companies are leaving. While 1H, there is not valuation done, I suspect come year end, a downward revaluation will happen.

The progress of the office buildings are rather slow. Until the dust has settled and the pricing is known, MUST share price will be volatile. I do hope the sales can be concluded so unitholders will know where they stand. The uncertainty hurts unitholders

[weijian]

Manulife REIT makes its first planned divestment in 2024. Interesting to see whether there is any value for the REIT if it decides to wind itself down.

Dec2022: 190mil
June2023: 165mil
Dec2023:158mil
1st Sept 2024 valuation at sale: 108mil after seller's rebates (-30% from last valuation in Dec2023)

I haven't followed how commercial properties are doing in the US (and that is a very big region). But the drop in 1st Sept 2024 market valuation from Dec2023 looks huge (-30%), and much bigger than the Dec2022 to Dec2023 drop whether in percentage or aboslute terms. Granted, the general market has continued their decline but I think it wouldn't be unreasonable to suspect that the REIT's appointed valuers for their annual reporting, were pretty lenient with the ones who paid the valuation bill.

DIVESTMENT OF PROPERTY KNOWN AS CAPITOL LOCATED IN SACRAMENTO, CALIFORNIA

After taking into account the Divestment related expenses, the net proceeds from the Divestment are approximately US$108.8 million, resulting in an estimated net loss from the Divestment of approximately US$51.1 million

The book value of the Property of US$159.9 million as at 30 June 2024

Using the income capitalisation approach which consists of the discounted cash flow method and direct capitalisation method, the Valuer valued the Property at US$118.0 million as at 1 September 2024

https://links.sgx.com/FileOpen/Manulife%...eID=820292

[CY09]

2024 Divestment Target (108/230)

Based on its 2023 restructuring plan. MUST has to sell US$122 million more in property valuation. Otherwise, it will incur additional financing expenses. With 02 weeks left, MUST is really pushing the line to achieve its target. For investors, the worry is the additional interest expense which will push its ICR close to 1.5 times (the new MAS requirement)

[CY09]

A good thing is that MUST has informed the bad news before full year results are released.

https://links.sgx.com/FileOpen/Manulife%...eID=830157

Property valuations has fallen by 9.3% and revised leverage ratio is now 61%. I am willing to bet in end 2025, there will be another round of lower valuation because wave of US commercial loans are likely to mature and default resulting in auctions.

Second, MUST has guided it has to sell $200 million more in properties by end June 2025 and the REIT is confident it can complete it before this deadline. Quite an optimistic guidance, it might mean one of its top property (Exchange) could be the one sold.

Beyond end 2025, MUST will need to continue to sell more buildings as and when each tranche of debt matures, and with US office space being so weak, selling buildings from a point of weakness to me is not ideal.

[weijian]

Another asset sale, another loss to be recognized. If we were to trace back the original acquisition in mid 2017, it had been some sorts of "The Perfect Short". Mr Market has been approximately spot on with its weighing function, as the asset has been sold at effective prices that were ~30% of its original purchase/peak prices.

Sold in Feb2025 at 51.75mil (inclusive of 11.3mil rebates to the buyer for capex/rental arrears/free rent etc)
end Dec2024: 43.7mil
end Dec2023: 58mil
end Dec2022: 92mil
end Dec2021: 106mil
end Dec2020: 114.6mil
end Dec2019: 119.9mil
end Dec2018: 119.8mil
end Dec2017: 118mil
(Mid 2017) Maiden acquisition at 115mil (valuation at 116mil)

Plaza divestment: https://links.sgx.com/FileOpen/Manulife%...eID=833610

[CY09]

MUST highlighted one of the reason is the high maintenance CAPEX due to its age. It is built in 1985. If this is true, it is only the third oldest in the portfolio and signals the possibility of high cash outflow of MUST. Only two of MUST 9 buildings are much younger than Plaza. The rest of its office are built in 1987-1991 range.

https://links.sgx.com/FileOpen/Manulife%...eID=833599

Based on latest year cash flow, MUST operating cashflow equals to its CAPEX + interest expense as of now. This means if the REIT has to continue upkeeping its portfolio, there will be no cashflow left for unitholders. Anyone buying with hopes of the REIT resuming distribution will be in for a long time. Further disposition has to happen at a time when the REIT has falling vacancy due to its portfolio situated in democrat states which has high corporate taxes with company HQ leaving for Florida and the rest of the red states.

The US treasury is also downsizing its lease (or was it leaving) Penn based on one of the SGX older announcements i read. This means it will be left with an old building with low vacancy

This is a REIT that is primed to be stripped apart as its end game