Manulife US REIT: Expect Lower Occupancy and Expectations of Its Divestment Plans (Nov 2024)

As expected, the office building in Capitol of Manulife US REIT (MUST) portfolio was sold. One of the main reason why I thought Capitol would go was because it is a good asset with a high occupancy rate relative to other offices in MUST's portfolio.

2024 Divestment Target (108/230)

Based on its 2023 restructuring plan. MUST has to sell US$122 million more in property valuation. While its Tranche 1 buildings are placed on the market, I do feel 02 buildings (which coincides to how many they had placed for sale) would be negotiated for sale close to the agreement deadline; just over the line to achieve US$122 million

Tranche 1 Assets are Weak

Figueroa- Expected sale but a big downward valuation. Figueroa is currently valued at US$139 million for end 2023. However, in its submarket, the sales of its comparables are at US$137-$140 psf. Realistically, Figueroa is worth about US$100 million.

Diablo- Majority of its tenants are vacating end 2024, it is likely occupancy will drop to 30% level. Being an old office building of Class B status, I think further downward revaluation will happen. The building looks like a US$30 million value and likely NPI will turn negative in 2025 Letting it sit on MUST book will be a big negative. Likely this building will be demolished by either MUST or a new buyer.

Penn- Another old building in MUST portfolio. Questions will be raised if the US Treasury will downsize its office space in Penn, which I believe is likely. No doubt refurbishment was done but it is an old building that regularly needs maintenance CAPEX to ensure its lifespan. I  expect it to be worth about US$80 million.

Centrepoint- Has the lowest amount of expiring leases among the 4. In terms of value, it is likely the most resilient and can fetch US$65 million range.

Overall Lower Occupancy, Likely Lower Valuations

Expect another downward valuation come end 2024. "Green shoots" of recovery is not here. It is unlikely the re-valuation will result in a convenant breach of leverage ratio of 80%.

I do not expect the submarkets MUST are in to recover until end 2026. However, the REIT has to complete its divestment plan by mid 2025. It has to sell about US$200 million more in properties.

The need to raise liquidity is putting the REIT in a weak position for sales negotiation. Buyers know it has to sell and during a time when office spaces are still weak.