Manulife US REIT

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Manulife US REIT joins FTSE EPRA Nareit Global Developed Index
* Index inclusion to take effect from 23 December 2019

Manulife US Real Estate Management Pte. Ltd. (the "Manager") of Manulife US REIT, the first pure-play U.S. office REIT listed in Asia, is pleased to announce that the REIT will be included in the FTSE EPRA Nareit Global Developed Index with effect from 23 December 2019. 

More details in
Specuvestor: Asset - Business - Structure.

It is highly leveraged at 42+%, but it has escalating rentals with rising net property income due to its US portfoilo. The REIT's yield is now at 14% based on one past year of declared dividends.

I wonder why the market is pricing it at 14% yield (likely due to its potential increasing interest rate payments with rate hikes and loss of some customers about 6% of office space)

Due to the change in fair value of properties, Manulife's leverage ratio has risen from 42% to 49%; just 1% shy of busting MAS's rgulatory limit.

In my view with the rising cap rate due to the Fed's potential 2-3 more cycles of interest rate hike and continuing vacancy in US office space, it is likely another write down in fair value will occur for Manulife assets in 2023. This will likely cement a need for equity raising to bring it back to within MAS's 50% regulatory limit for leverage
Manulife US Reit abandons H1 distribution; all loans reclassified as current liabilities
"SINGAPORE – Manulife US Real Estate Investment Trust (Reit) declared no distribution for the first half-year ended June 30, as the Reit has breached banks’ unencumbered gearing ratio, causing all its loans to be reclassified as current liabilities.


As at June 30, Manulife US Reit’s aggregate leverage ratio stood at 56.7 per cent.

Its manager said the high gearing ratio was the result of a decline in portfolio valuation, which is beyond its control...."
In just a year, Manulife has tumbled 90% to 7 cents.

What investors are worried is that the REIT will force itself to do a massive dilution in order to repay debts to meet convenants
I wonder will this serve as a lesson to REIT managers not to overleverage. Manulife leverage started off at 40%, a few acquistions was made due to its revaluation gains pushing it to 41.9%.

Then declining occupancy and higher risk free rates pushed it to 49% and then eventually 59%.

This is afflicting both PRIME and Keppel Pacific Oak REIT as well where their declining occupancy has pushed down their valuation and increased their leverage ratio (such as PRIME which has gone from 37% to 43%)

Pherhaps future REIT managers will have to learn to maintain their leverage ratio at low 30% and not keep buying portfoilo to expand AUM without heed
Personally I think REIT managers will learn the wrong lesson - that they can take big risks and investors will be stuck with the losses e.g. this year, a Brookfield fund has defaulted on over US$1bn in debt on properties in Downtown Los Angeles, and is at risk of default on another US$763m coming due in October, while Pimco's Columbia Property Trust has defaulted on US$1.7bn in debt. Meanwhile a Blackstone fund has defaulted on EUR 531m of debt tied to offices in Finland.

Manulife used to own all the assets in MUST. It sold down to under 10% for the IPO as part of regulations. So it only had less than 10% of its original capital at risk. In the meantime it collected management fees, the leverage on other people's money was 10:1.

Rights Issue
In theory, MUST can just do a rights issue. The problem is that for the REIT distributions to remain tax-free, the sponsor (Manulife) cannot own more than 10%. But any undersubscription would cause participating unitholders to increase their stake.

If Manulife ends up with over 10% (very easy as it is already at 9.1%) they would need to sell off their units, probably at a discount. They would lose money trying to save MUST, throwing good money after bad. But if Manulife doesn't participate in the rights issue (to avoid going over 10%), it is unlikely anyone else will. Damned if they do, and damned if they don't.

Alternatively, Manulife can privatize MUST. The problem is the price. MUST unitholders might think that book value is a fair price, but remember that Manulife itself is listed and its own shareholders would rather get a bargain.

If Manulife offers book value, the MUST unitholders will surely accept. But then Manulife's own shareholders might sue the directors for doing a bad deal, because if it looks elsewhere it can almost certainly make a similar investment for 0.5x (or even 0.3x) book value.

Manulife cannot merely increase its stake while keeping MUST listed, it would bust the 10% limit, so the offer has to be all-or-nothing, basically a scheme of arrangement needing 75% to agree. The big investors will be the swing votes, and if MUST cannot get enough of them to agree, it will be left to the minority investors at the EGM, a recipe for failure.

But which institutional investor is going to agree to take a huge loss? All of them are presumably pressuring Manulife to offer something close to book value. And Manulife's directors are probably looking carefully at their share register, in case an activist investor shows up ready to sue. Manulife is walking a valuation tightrope - too low and the deal fails, too high and they get sued for negligence. Perhaps they will conclude that the best thing to do is nothing at all.

So right now we have a very bad situation. Hopefully, nobody here has much capital stuck in MUST.
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