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Manulife US REIT's aggregate leverage falls slightly in 3QFY2023 to 56.0% from 56.7%

Jovi Ho
Jovi Ho • 4 min read
Manulife US REIT's aggregate leverage falls slightly in 3QFY2023 to 56.0% from 56.7%
The REIT announced on Oct 20 that it had secured a 65-month renewal for Kilpatrick Townsend, its largest tenant at its 1100 Peachtree property in Midtown Atlanta. Photo: MUST
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Manulife US REIT’s (MUST) aggregate leverage fell slightly to 56.0% at the end of September, down from 56.7% at the end of June, according to the REIT’s Nov 3 operational update for 3QFY2023 ended September.

The REIT’s unencumbered gearing ratio, meanwhile, fell to 59.9% from 60.2%, following a good faith payment in August, which the manager announced at its 1HFY2023 results on Aug 14. The unencumbered gearing ratio refers to the ratio of consolidated total unencumbered debt to consolidated total unencumbered assets per MUST's loan agreements. 

MUST’s interest coverage ratio (ICR) fell to 2.4 times as at Sept 30, down from 2.6 times at June 30 and 2.9 times at March 31. With its ICR below 2.5 times, MUST now faces a 45% regulatory limit on its aggregate leverage, down from 50% previously.

The ICR is calculated by dividing the REIT’s trailing 12 months earnings before interest, tax, depreciation and amortisation by the trailing 12 months interest expense and borrowing-related fees.

As at Sept 30, the REIT’s weighted average debt maturity is 2.3 years, with US$39.4 million ($53.80 million) of debt maturing in the remainder of the year, US$141.7 million due in 2024 and US$282.5 million due in 2025.

MUST’s weighted average interest rate rose further in 3QFY2023 to 4.38% from 4.10% in 2QFY2023 and 3.98% in 1QFY2023. The percentage of MUST’s fixed rate loans, meanwhile, fell to 69.2% from 80.2% last quarter.

See also: Manulife US REIT halts distributions as manager mulls options

The REIT’s portfolio occupancy stood at 84.7% as at Sept 30, down from 85.1% in the previous quarter, with a portfolio weighted average lease expiry (WALE) of 5.1 years, up from 4.9 years last quarter. The REIT’s manager executed 193,000 sq ft of leases in 3QFY2023, amounting to 5.8 years of WALE.

MUST posted positive rent reversion of 24.2% for 3QFY2023. The REIT announced on Oct 20 that it had secured a 65-month renewal for Kilpatrick Townsend, its largest tenant at its 1100 Peachtree property in Midtown Atlanta. 

The Atlanta-headquartered international law firm’s current floor plate makes up about a third of the net lettable area (NLA) within the property. Its lease term was due to expire on July 31, 2025. With the renewal, Kilpatrick Townsend’s lease will now expire on Dec 31, 2030.

See also: Manulife US REIT halts DPUs in 1HFY2023; unencumbered gearing ratio down to 59.7%

According to the REIT, the renewal of its fourth-largest tenant validates its commitment to renovate 1100 Peachtree’s ground floor and common spaces. The renovations, which will see a new lobby, elevator cabs, upgraded landscaping and hardscaping of the building exteriors among some of the changes, are expected to be completed in 2025.

Announced in November 2022, the asset enhancement initiative (AEI) is expected to cost around US$18 million.

Working with sponsor

MUST halted its distributions for the 1HFY2023 ended June 30 after it breached a financial covenant in some of its financing documents, which resulted in the REIT’s loans being reclassified as current liabilities. The breach came after the REIT announced that its portfolio valuation fell by 14.6% to US$1.63 billion as at June 30.

The REIT’s manager says it is working alongside its sponsor “to not just negotiate the waiver of the breach, but also assemble a holistic sponsor package that will help to address MUST’s longer-term liquidity needs and provide financial flexibility”. 

The manager adds that payment of distributions is part of the ongoing negotiations with lenders. “The manager will make an announcement when definitive agreements in relation to the loan restructuring are signed.”

Prior to the halt, MUST had paid distributions half-yearly. For 1HFY2023, MUST posted a net loss of US$247.6 million, down from earnings of US$62.8 million in 1HFY2022, while distributable income fell 17.4% y-o-y to US$37.9 million.

As at June 30, MUST has a cash balance of US$133 million. “We expect to continue operating our portfolio prudently. We have set aside a budget for essential capex for 2023 and have reviewed our 2024 budget to determine what essential capex we can undertake,” says the manager. 

Units in Manulife US REIT closed flat at 5.3 US cents on Nov 2, down 80.4% year to date.

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