Wednesday 29 November 2023

Clarification Required by Manulife US REIT Management and its Board On its Recapitalisation Plan

 Manulife US REIT(MUST) has announced its recapitalisation plan. There are 3 parts to it:

(i) The sale of Park Place at US$98.7 Million to the sponsor;

(ii) A sponsor granted 6 year US$137 million loan of 7.25% interest + exit fee (total equivalent of 10.7% eir)

(iii) Halting of Distribution until 2025


I have a few clarifications that MUST Management and Board could clarify.

(A) Will the halting of distribution for 2023 and 2024 attract a withholding tax on MUST?

(B) If (A) is true, why has the board decided to forego 30% of profits each year which creates a permanent loss to shareholders. The board could instead opt for the following scenario:

(B1) Announce a 90% payout ratio as dividends;                                                                        (B2) Concurrently announce a non-underwriting rights issue for the amount of US$150 million, pricing Manulife US REIT rights at a large discount; 2 rights for every 1 share at US$0.05;        (B3) Any shortfall south of US$137 Million will then be covered by the sponsor loan according to the terms as stated in (ii).

My Thoughts

Everything hinges if (A) is true. 

If (A) is true, the current proposal issued by MUST creates a loss via taxes to all unitholders and is not the optimal solution. 

If (A) is false and no tax has to be paid due to the halting of distribution for 2023 and 2024, the current proposal by MUST is optimal.

If (A) is true, my proposed solution from B1 to B3 sidesteps the need to pay a 30% tax and unitholders get a chance to participate in the recapitalisaion. The stock market's function is to act as a conduit to raise funds if needed. Companies in need of money can always do a corporate action of issuing rights giving shareholders the chance to decide if they want to participate or encash their rights to allow non shareholders to participate. Pricing the rights at a large discount to the price of US$0.05 will attract a high subscription rate which meets the cash needs of US$137 million. The REIT manager need not underwrite it and will be able to subscribe to its allocated rights to maintain a 9.8% shareholding.

I am a non-investor of MUST. Hence, I will not be able to participate in the EGM. Neverthless, I will be forwarding the above to SIAS for their attention and hopefully MUST can clarify. 


  1. Hi Choon Yuan, thanks for dropping by and I have read your blog post. Let me add on my thoughts to 2 of your main queries (have dropped this reply here in case you missed the reply at my blog post):

    1. This is a breach of banking covenant and a high risk of bank loans default.
    If I am the banker, I will have to impose certain conditions to freeze the payout immediately in order to conserve as much capital as possible and to ensure unit-holders have as much skin as possible in this fiasco.

    If I am the management of MUST, in such uncertain economic conditions so near the year end, I will also have to freeze the payout temporarily until the financial position stabilized and also strengthen.

    I reckon it is a mixture of these 2 conditions by the above mentioned parties that give rise to the halt in distribution temporary for 2 years;

    2. The rights issue you proposed and whereby anything short to be funded by the Sponsor’s loan is brilliant. However, the devil is in the details. This just would not work out. Reason being that if only the majority unit-holders participate while some or most of the other unit-holders refused to take part, this means that the unit-holdings for these individual unit-holders would exceed 9.8% which would mean a permanent withholding tax of 30% imposed on the distribution. Such is the nature of the 9.8% US Tax planning vehicle structure in place.

    To add on to point 2, your proposal may have to involve a 3rd parties stepping in to mop out excess unsubscribed units given that MUST financial position currently is crumbling- this is the only way to avoid breaching the 9.8% individual stake holding curse. In better times, maybe a group of bankers can step in to underwrite this rights issuance exercise but definitely not at this juncture.

    I am not exactly pleased with the current option. But seems MUST Mgr hands are tied.

    Your thoughts?

  2. 1) If a) halting distribution attracts 30% corporate tax and b) the banks are halting distribution, then MUST should do a rights/loans quickly to unfreeze it.

    2) For my proposal, this is why I said the mgmt need not underwrite etc, they just subscribe to the amount of rights accordingly to maintain 9.8% even if it is undersubscribed. In the event of under subscription, their shortfall will be covered by the sponsor lead loan

    1. Hi Choon Yuan, allow me to illustrate. Assume there are 2 shareholders A & B only in a REIT. 1000 shares total. Each 500 shares (hence 50% respectively). Let’s say 1 for 10 rights issuance and only A take up and the other do not take up.

      A will end up with 550 shares while B still 500 shares. Total shares now 1050.
      A’s percentage now is 52.4% which is an increase from his original 50%.

    2. Hi Blade knight, If all shareholder other than Reit Manager subscribes for 80% of their allocated rights, REIT manager shall only apply for 80%; 20% should seek sponsor loan.

      If all shareholder other than Reit Manager subscribes for 100% of their allocated rights, REIT manager shall only apply for 100%; 0% to seek sponsor

      If all shareholder other than Reit Manager subscribes for 60% of their allocated rights, REIT manager shall only apply for 60%; 40% to seek sponsor

    3. Hi Choon Yuan, thanks for elaborating your thoughts. I am not sure whether the above can be done as it seems that the sponsor will get special rights to choose their % ending shareholdings in the rights exercise instead of the usual way of specifying the number of shares they want. Does this apply equally to other shareholders that they can also opt for the same % ending effect instead of specifying the number of shares to subscribe?

      Think will need legal clearance and also whether all unit-holders allow such different treatment for rights issuance exercise.

    4. Hi Bladeknight, Manulife as sponsor can subscribe to its full offerings under a rights scenario, however, post results, if it has more than 10% in shareholdings, it has to sell off in the open market. Manulife might not take a loss at all given that market price may be higher than the highly discounted rights issue price. The only thing is that Manulife US participates less in the upside. This is why I have a feeling the board of independnt directors did not enquire further on this route knowing the outcome. It could negligence by the board of independent directors, though i hope they can show notes of minutes to prove otherwise and they did ask about rights raising with thorough discussion

  3. I prefer to liquidate at the moment

    1. liquidate now at fire sales price. Shareholder will get back nothing. ZERO