What can Manulife REIT Do to Right the Sinking Ship? Is it Too Late?

As narrated in my latest post, the US office (commercial space) is grossly oversupplied with vacancy rates at 20% for the large cities. 

For places like Atlanta, Washington and Los Angeles, the office vacancy rate is slightly above 20% and he worst hit in the office glut. Unfortunately for Manulife, 44% of its current portfolio are based in these 3 cities. These were the properties which experienced the largest drop in valuation in the recent exercise as well:

What's Next for ManuLife REIT

As said in its Q&A, while Manulife REIT is considering a rights issue, it is constrained by the 9.8% ownership limit. If Manulife is unable to participate in the rights, it is unlikely many shareholders will participate in it as well and the rights raising will raise insufficient cash to bring its debt

Offloading Assets

In my view, this is now the more probable scenario where the REIT will offload its assets to the sponsor. However time is running out. Its debt is of US$1 billion and the proeprty is valued at US$1.633 billion. 

It is likely the REIT will be forced to sell off about US$400-$500 million in properties to meet debt convenants. In all likelihood, it will be the sponsor, Manulife, who will be the buyer. As Manulife is a listed company, it has its own fudiciary duties to ensure that its own shareholders get the best value. Therefore, there is no chance that Manulife will pay amounts much higher than what valuers of the REIT have valued as of end June 2023.

This means shareholders of Manulife REIT will need to realise the valuation losses of the properties. In addition, it is definitely not good to delay the sales further to the end of the year because another round of downward valuation is on the cards which will again affect the value. More properties will need to be offloaded as it drags on. Unitholders of the REIT may end up having only half of their portfolio when the upturn of the US office market occurs.

Final Thoughts

The comfort for unitholders is that unlike Eagle Hospitality Trust, Manulife REIT is not in some iffy contracts, the REIT has propoerties that are legally generating income. However, due to the ongoing office oversupply in USA, the REIT has been hit. What made matters worse was that Manulife, the sponsor, geared up the REIT in 2018/2019 to a high of US$2.1 billion on 42% leverage. The sponsor took too much risk offloading its own into the REIT as monetisation. This has caused the rest of the 90% of the shareholders to suffer. The sponsor of the REIT failed to act propertly for its investors.

This shows the ugliness of the current REIT regime where the sponsor can be the REIT manager as well, own a maximum of 9.8% and easily offload its assets into investment vehicles. This is akin to realising property gains and then having only 10% of your capital at risk instead of 100%. 

This to me has some conflict in interest. Singapore has to throughly review its REIT regime because this can be subjected to abuse where if gone unchecked, developers/sponsors may abuse the trust and profit among themselves. The REITs will end up in the same situation as Manulife.

Sabana REIT was a recent example where unitholders were upset with the antics of the sponsors offloading assets and an EGM occured resulting in the formation of their own REIT manager, independent from the sponsor. The ex-sponsor/maager got worried of this and threatened voters that they will be worse off if the former was voted out, which does not seem to be the case.

Checks and balances have to be in place where the manager is an independent party with no affliations to the developers/sponsor when managing the assets and reserves. Otherwise, a repeat of Manulife US REIT will occur. As the party with full control and left unchecked, the sponsor/manager could easily offload assets realising the gains to themselves while the unitholders are left to foot the bill.