Friday 18 August 2023

Manulife US REIT sell down: Don't Buy this Falling Knife

The 1-year chart of Manulife US REIT has fallen 85% from 53.5 cent to 7.8 cents as of writing. 

Price to book ratio is now 0.2 times. It's market capitalization is now US$138 million. However, there is a warning sign which explains why share prices is at an all time low. 

Rights Raising 

Manulife US REIT is in breach of its debt convenants. Discussion with its bankers seems tough and equity raising to raise cash is the only solution. Below is the current balance sheet of the REIT:

Debt: US$1.03 Billion

Cash: US$133 million, Half year earnings: US$38 million

Property Value: US$1.633 Billion

Given that there is likely a further downward valuation of its properties at year end, ManuLife's property value should be US$1.55 billion. To reach a safety of 45% leverage ratio, this means debt have to be reduced to approximately US$700 million. A reduction of US$300 million.

Given the situation and its cash pile, ManuLife will have to do an equity raising of US$200 million at the current share price of US$0.078, price book ratio of 0.2 times.

Thos who are still invested in Manulife will have to prepare for a heavy dilution in shareholdings. It is likely an exercise of 3 rights for every 2 shares to save the REIT.

Manulife REIT's property are still profitable, the issue now is that it is in breach of its debt limits placed as well as those of MAS; unless there is a waiver of their debt limits, shareholders will be painfully diluted out of their current shareholdings. 

The alternative to raise the needed cash is to sell the properties in its portfolio now at the current low point of the USA commercial property cycle. To sell at such low prices of its office building means there will be a permanent loss in value to shareholders.

This is why it is still not a good time to buy Manulife US REIT.

<Not long nor short on the REIT> 

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