What is the Value of Manulife US REIT - Magic number Value is US$0.075 cents

Manulife US REIT (MUST) has announced a plan for its survivial till beyond 2025. There is no doubt that MUST will survive given the plan. But it is a very damaging plan.

Loans and then Building Sales to Repay

Much has been written about how Manulife US has given a "loan-shark loan" of effective interest rate of 10.7% to Manulife US REIT. It is no doubt a loan shark loan because it is 5.3% + SOFR, that is a very wide spread and given that MUST occupancy is still at a healthy above 75%, Manulife is indeed taking the opportunity to attract benefits from MUST shareholders.

Personally I would have preferred a dilutive rights issue which will then let shareholders decide if they want to participate or sell off their entitlement. The current plan leaves shareholders with no choice and the possibility of incurring US withholding tax for halting distributions based on the percentage of shareholders who do not submit their tax forms. It is an inferior plan in my view which protects the stake of the sponsor Manulife Insurance and to extract a high benefit at the expense of shareholders. I have personally proposed a better plan.

Building Sales

Manulife has to sell about US$328 million in buildings over the next 2 years to ensure it goes below leverage requirements. To me, that is a big jump. Lets look at its tranche of sales it planned. In addition, the value of the buildings are found here

From the looks of it and applying a 25% discount because buyers will know MUST is desperate, the entire tranche 1 portfolio will have to be sold. Capitol might have to go as well and MUST will then be left with 05 buildings to function as a REIT. In my view, the remaining portfolio has a value of US$680 million and with 49% leverage. This means equity of US$333 million will be left in MUST. 

Taking a 0.4 times B/V in consideration that the 5 remaining buildings are the most recent completed with lower CAPEX, that leaves about US$133 million fair value. Hence the fair value of MUST is $0.075 cents (at current share price that is about 50% in upside given the crazy sell down today)

Shareholders Can Benefit More, but REIT Manager Loses Out

However, in my view, there is a better option and that is for MUST to do an equity rights raising of up to $150 (or $135) million (in lieu of the sponsor loan), while reinstating the distributions to shareholders (who then can use the dividends to fund their rights entitlement if they want).

Getting the cash from shareholders prevents the assets to be sold within a timeline at the trough of a US property downcycle and prospective office building buyers will not be able to put MUST on the line knowing that its desperate. An equity raising of 2 for 1 at US$0.05 should put the resulting fair value of MUST at about US$0.11 (which allows for MUST shareholders to gain a further 46% in upside as compared to the inferior plan proposed by MUST REIT manager)

Rights Issue

In theory, MUST can just do a rights issue. The problem is that for the REIT distributions to remain tax-free, the sponsor (Manulife) cannot own more than 10%. But any undersubscription by Manulife would cause other participating unitholders to increase their stake.

If Manulife ends up with over 10% (very easy as it is already at 9.1%) they would need to sell off their units, probably at a discount. They would lose money trying to save MUST, throwing good money after bad. Therefore diluting their stake in MUST and enjoying less of the future upside. However, the benefits is that (i) MUST keeps most of its buildings intact, (ii) pay its debt down without being subjected to high interest rates and (iii) prevent any US withholding tax liability from halting distributions.

The current proposal put forth by MUST is not the optimal solution in my view. It is because MUST reit manager and its sponsor do not want to enjoy less of the future upside; hence it proposed the less optimal route which carries the possibility of attracting a small amount of withholding tax that hurts all stakeholders. There is a better solution but it involves Manulife being diluted or, if it has good foresight, to subscribe for a proportion of its allocated rights to maintain just below 10% stake.

2nd Alternative- Diablo + Park Place to Sponsor and Equity Raising

Alternatively, the sponsor could have volunteered to continue its planned purchase of "Park Place" and purchase 1 more building of "Diablo", plus conduct a less dilutive rights raising given these 2 buildings were the least revised downwards in the latest round of valuation. Diablo is in the tranche 1 list and likely will be sold off. I do not think it can fetch its expected valuation if buyers know it is going to have to be sold off within 2 years. Manulife US could have bought it as well while having justifications of its sale to its own parent company shareholders that it had bought at the latest valued figures of US$58.6 million. After which a US$100 million in rights would only be needed.

MUST Investor Relations could feel free to approach me to discuss and dissaude why its plan is the best approach to save the REIT and not because it does not want to be shortchanged. Given the countless times the REIT has bought properties from Manulife US, I felt it is justified for them to be diluted given the decision mistakes.

I am not an investor of Manulife US REIT, therefore I would not be able to participate in the SIAS dialogue nor the EGM and hence why I have penned my thoughts online.