Manulife US REIT (MUST) has posted income available for distribution (DI) of US$22.9 million ($30.38 million) for 1HFY2024 ended June 30, 39.8% lower y-o-y. That said, MUST has halted distributions until end-2025 as it rolls out its recapitalisation plan to address rising gearing and falling valuations.
In an Aug 5 announcement, the manager of the US office REIT blames higher finance expenses incurred due to higher interest cost from 1HFY2023. From July 2023, the manager elected to receive payment of 100% of its base fee and property management fee in cash. To provide a like-for-like comparison, the manager offers an adjusted DI in the prior year period to reflect the manager’s base fee of US$3.8 million and property management fee of US$2.5 million being payable in cash instead of units.
Hence, adjusted DI only fell 27.8% y-o-y, according to the manager. Adjusted DI per unit is down 27.5% y-o-y to 1.29 US cents.
In the six months till June 30, MUST recorded gross revenue of $86.7 million, down 12.9% y-o-y; and net property income (NPI) of $42.8 million, down 22.7% y-o-y. These were due to lower rental and recoveries income from higher vacancies, which rose 6.7% y-o-y across the portfolio and higher property operating expenses, say the manager.
Adjusted to exclude Tanasbourne and Park Place, which were sold in April 2023 and December 2023 respectively, same-store 1HFY2024 gross revenue was down 8.1% y-o-y while NPI was down 16.7% y-o-y.
Gearing stable
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As at June 30, MUST’s unencumbered gearing ratio and aggregate leverage ratio held steady at 60.0% and 56.3%, from 59.7% and 56.7% respectively as at March 31.
Interest coverage ratio fell to 2.2 times from 2.3 times as at March 31, while weighted average debt maturity shortened slightly to 3.0 years from 3.2 years over the same quarter.
To mitigate cash flow volatility resulting from interest rate movements, MUST targets to maintain an optimal hedge ratio of between 50% and 80%. The percentage of hedged/fixed rate loans remained at 80.2% as at June 30.
See also: Manulife US REIT reports occupancy rate of 78.7% in 1QFY2024 business update
Leasing momentum 'positive'
In 2QFY2024, MUST’s occupancy was stable q-o-q at 78.4% compared to 78.7% in the previous quarter.
Leasing momentum remains positive with 428,000 sq ft of leases executed in 1HFY2024, despite the challenging conditions in some of MUST’s submarkets, says the manager. Representing 8.5% of portfolio net lettable area (NLA), these leases have a long weighted average lease expiry (WALE) of 7.3 years.
The bulk of leases signed in 1HFY2024 comprised renewals (75.8%), while new leases made up 13.8%, and expansions the remaining 10.4%.
These tenants include “creditworthy” companies from diverse sectors including technology, retail, financial and healthcare, contributing further to a resilient tenant base, says the manager. The largest lease signed was for Amazon, the anchor tenant at 10 Exchange Place (Exchange) in Jersey City, New Jersey, and one of MUST’s top five tenants. Prior to the renewal, its lease was previously due to expire in April 2025.
Amazon occupies 129,000 sq ft, or about 17% of the NLA, at the 30-storey Exchange office tower and the 3+ years lease renewal comes with modest tenant concessions and no early termination options.
See also: MUST obtains regulatory approvals for CEO, CFO appointments
The average rent reversion of leases signed in 1HFY2024 was negative 10.6% and majority (11 out of 17) of the office leases were signed at above market rents.
As at end-June 2024, the portfolio WALE lengthened to 4.7 years, from 4.3 years three months ago.
There is approximately 1.4 million sq ft in MUST’s leasing pipeline across its portfolio. However, the leasing environment remains “challenging” and the manager says it is “strategically prioritising leases that create liquidity and maximise value for MUST and its unitholders over chasing higher occupancy”.
MUST’s lease expiry profile has 14.7% of leases by NLA expiring in 2HFY2024 and 9.6% expiring in FY2025.
Asset sales
MUST’s unitholders voted at an EGM in December 2023 to approve a recapitalisation plan and save the REIT from liquidation. One of the three resolutions passed provides the manager and lenders with the authority to divest “non-core”, “Tranche 1” properties, albeit at a minimum sum of US$328.7 million.
As at the previous results briefing, four Tranche 1 assets in MUST’s portfolio are potentially up for sale: Centerpointe, Diablo, Figueroa and Penn. The manager said then that it targets asset sales of some US$100 million by 2Q2024 or 3Q2024.
Among its portfolio of 10 assets, Tranche 1 assets account for 66% of the expiries in the next 1.5 years, says the manager in the Aug 5 announcement.
Figueroa, a 35-storey Class A office building in Downtown Los Angeles that has been in the portfolio since its IPO in May 2016, saw the largest decline in NPI, falling 85% y-o-y in 1HFY2024 to US$0.7 million. The manager blames the exit of US asset management firm TCW Group, whose lease for some 189,000 sq ft at Figueroa expired on Dec 31, 2023.
Meanwhile, there are lease expiries in 2024 for the Tranche 3 assets, Phipps and Michelson, in respect of which the manager is expecting a renewed and partial backfill respectively.
MUST’s top 10 tenants have a WALE of 6.8 years by NLA and there are no significant termination options in leases with these tenants within the next five years.
“Overall, its tenant base is well-diversified across more than 20 trade sectors with no single tenant contributing more than 5.1% of gross rental income,” says the manager.
John Casasante, CEO and CIO of the manager, says the REIT is marketing “three of our properties for sale”. “Our strategic focus for MUST centres firmly on improving returns for unitholders through a strategic disposition plan, optimising leasing and business operations, and exercising prudence in capital and liquidity management. The execution of our recapitalisation plan remains a top priority, and we have commenced the process to sell three carefully selected assets that we believe would attract liquidity amid the challenging environment.”
Casasante, who was appointed on June 30, adds: “We have also commenced high-level discussions with potential off-market buyers for other targeted assets in the portfolio. The level of interest from prospective buyers has been encouraging, and we are optimistic that we should be in a position to achieve the milestones of the master restructuring agreement.”
MUST will hold a results briefing later in the morning of Aug 5.
Units in Manulife US REIT closed 0.1 US cent lower, or 1.27% down, at 7.8 US cents on Aug 2. Its unit price is down 22% over the past year.
Tables: MUST
