Monday 6 November 2023

Manulife US REIT: 3Q Results, Strong Rental Reversion, Sale Needed to Tide itself Over, Lesson Learnt

Much has been written about Manulife US REIT (MUST) So I shall pen the information that are worth noting and my thoughts of its ability to survive as well as lessons learnt for all REIT managers.


Rent Reversion + 10%, 3Q up 24.4%

Occupancy has reduced to 84.7%

Leverage: 56.6% 

ICR: 2.4 times (69.2% are fixed rate loan)

My thoughts

The ICR is of a concern. It has to be 2.5 times and above because MAS dictates so. However, with occupancy rate decreasing slower than their rental reversions, my sense is that in Q4, MUST will return to 2.5 times. So it can live to fight another quarter.

The other concern is the leverage ratio and how it must not exceed 60%. It is definite that year end, MUST will suffer another downward property revaluation and the matter of breaching 60% in its loan conditions will surface.

Sale of Office Buildings likely in its Plans

MUST is unlikely to undergo an equity raising. In my view, it can be done but the sponsor will have to subscribe less than its entitlement. Personally, an equity raising is the best way to delever the REIT, the event of a share raising should be able to garner 70% of shares (including excess applications) while its sponsor subscribes to maintain only 9.8%. I will say it here, in the event that Manulife proposes an equity raising to raise at least US$70 million in a 1 right for 1 share deal with sale of Phipps, I will attempt to purchase the excess rights (i am currently a non shareholder) because a US$70 million cash injection would rescue the REIT.

With equity raising, only 01 office building has to be sacrificed and it is likely Phipps, Atlanta. MUST will survive (even beyond 2025).

However, without equity raising, it is likely a second office building, Park Place or Penn, will be sold to delever.

I prefer equity raising to be done and when the upcycle comes sell Park Place or Penn to lock in a high valuation and reward long suffering shareholders who are going through this terrible time of 2022-2024.

Will MUST Survive?

Answer: Yes, the question is how many properties will it lose in the battle of attrition against the office glut and servicing of debt. 

This is the issue I have with many Singapore REITs. During good times, the sponsor tries to offload as many office buildings at high valuations and the REIT managers, due to ties to the parents, will listen and accept. However, during bad times, the fact they had acquired too many means the child REIT becomes over levered and are on the brink. Suntec REIT is another where ARA has offloaded its Australian office assets. It is a recent occurrence since 2014 because many parent companies realised the zero rates is transitiory and took the opportunity to lock in good properties by selling over valued properties to their child REIT. 

MUST suffered the same fate and I hope existing shareholders will remember this. 

MUST REIT will survive, but shareholders have to remember this winter and the loss of their office buildings. I am quite sure during the next upcycle, Manulife will try to offload into the REIT again to profit and benefit its own shareholders and policyholders; then I am not sure if MUST manager would be independent enough to learn of the mistakes they made today.

This epsiode has shown how even a REIT with 33.7% leverage ratio can snowball to be a 60% leveraged REIT with declining ICR due to the prolonged interest rate hike and the fact that the parent keep offloading assets which levered MUST even higher. For info, this is not the first time rates has hiked until the current levels. 2006-2007 saw the same cycle and what happened was a collapse in the real estate market. If I were to say, this is a once in 20 year event which weeds out the over-leveraged. 

Any good REIT manager who wants to be around in the long term has to remember this- 

(i) Do not buy too many assets during the good times

(ii) At the lowest of the cap rate cycle, leverage yourself only to the 20% ratio level if the intention is not to pay down the debt and give out 100% payout ratio as dividends. This is because the property value can lose half its value when cap rate and vacancy creeps up. Hence prepare for the worst case which seems to be a 20 year cycle event.

(iii) Alternatively if a REIT is paying only 90% payout ratio, a slightly higher leverage ratio of 30% is possible, provided the remaining 10% is used to pay down the debts every year and not to keep for AEI or unique situations like giving anniversary dividends (sounds familar? that's what Keppel Singapore REIT is doing and is walking itself to its death if interest hike continues)

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