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Asset disposals ‘worth the wait’, even with penalty fee: MUST chairman

Jovi Ho
Jovi Ho • 5 min read
Asset disposals ‘worth the wait’, even with penalty fee: MUST chairman
Figueroa, an office property in Downtown Los Angeles owned by MUST. Photo: MUST
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New faces fronted Manulife US REIT’s (MUST) 1QFY2024 virtual briefing on May 8. Instead of CEO William “Tripp” Gantt, the manager’s CFO-designate Mushtaque Ali led attendees through the REIT’s quarterly updates, which was headlined by a drop in portfolio occupancy to 78.7% from 84.4% at the end of 2023.

MUST attributes this to the departure of the TCW Group from its Figueroa property in Downtown Los Angeles. TCW, whose lease expired in December 2023, had occupied some 189,000 sq ft of net lettable area (NLA) and contributed 4.4% of the REIT’s gross rental income (GRI) as of Dec 31, 2023.

After TCW left, occupancy for the 35-storey office building fell to 56%, according to management, down from 81.9% at end-2023. Overall, MUST’s rent reversion for the quarter stood at a negative 9.5%.

John Casasante, CEO- and CIO-designate of the manager, dialled in from the US but stayed muted throughout the briefing, as he is still undergoing the Monetary Authority of Singapore’s regulatory process. Thus, he was unable to answer questions.

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Casasante and Ali were appointed on April 8 and 12, respectively. Their appointments were announced in March as part of a surprise leadership renewal that will see four MUST management team members depart on June 30. Gantt did not join the briefing, nor did outgoing CIO Patrick Browne, who is based in the US. Outgoing deputy CEO Caroline Fong, while present in MUST’s boardroom, did not speak; and replacing outgoing CFO Robert Wong on the call was MUST’s head of finance, Choong Chia Yee, though no questions were directed at him.

Instead, MUST’s chairman, Marc Feliciano, fielded questions with Ali. According to Feliciano, MUST is one of “three or four active landlords willing to capitalise a lease” in Downtown Los Angeles. “As a result, there has been an increase in leasing activity and interest, both in terms of what we call the big fish — or big anchor — that can take two, three or four floors, in addition to some of the smaller tenants.”

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If such leasing interest can be fully executed, Figueroa’s occupancy could “certainly” push into the “mid-eighties to low-nineties”, says Feliciano. “Leasing isn’t just to generate NPI [net property income] or recover NPI, but it also bolsters liquidity in the context of any potential disposition.”

Tenant improvements ‘manageable’

Ali says a “softer” market is putting pressure on tenant improvements (TIs). “I think it’s manageable, and we have enough liquid resources to manage our budget for this year.”

In the US, the landlord pays for renovations. MUST has never spent “more than US$35 [million] ($47 million) or US$45 million” on capital expenditures (capex) and leasing costs, says Feliciano.

These costs, including renovations, improvements and TIs, came in at US$44.5 million in FY2023, up from US$25.4 million the year prior and just shy of a US$45 million peak recorded in FY2019, the year two acquisitions were made.

While Feliciano acknowledges the “weaker market for landlords compared to tenants”, he notes that “tenants do need more space”.

He adds that concession packages in MUST’s submarkets dipped slightly in 1Q2024 and that net effective rents (NER) are “beginning to stabilise”. “We’ve got to see a few more quarters of that to say it has stabilised. But from a year-overyear perspective, we would tell you that there are more positive NER deals than there are negative NER deals.”

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Asset disposal on pause?

Under MUST’s recapitalisation plan, the REIT is required to dispose of a minimum of US$328.7 million of assets by June 30, 2025.

By the end of 2024, MUST must achieve net sale proceeds of US$230 million from the sale of “non-core” properties, or face the higher of two fees: either 1% of the shortfall from the sales target or a 75-basis point increase on the outstanding loans of US$738.7 million. “US$2.8 million by the end of this year is the maximum we could be exposed to,” says Ali.

MUST’s aggregate leverage fell to 56.7% as of March 31, down from 58.3% at the end of 2023. Before MUST’s AGM on April 18, the manager said two properties were being analysed for sale.

But US deals are “slow at the moment”, says Ali, especially since the US Federal Reserve has signalled a delay on rate cuts. “We have had a number of conversations with potential buyers, as well as brokers.”

Ali is “confident that a sale process will start imminently” later this year. Four “Tranche 1” assets are potentially up for sale: Centerpointe, Diablo, Figueroa and Penn.

The latter property, located in Washington, D.C., houses two key tenants: the United Nations (UN) and the US Treasury, which together contributed 7.8% of GRI in 1QFY2024. The US Treasury’s lease on some 120,324 sq ft of NLA expires in August 2025.

Across MUST’s properties, Penn recorded the second-steepest valuation decline over 2H2023, down 12.9% h-o-h to US$108.0 million. D.C. is a “very, very tough market” in terms of the operating and capital market cycles, says Feliciano. “Leasing activity is significantly down; we’re not seeing any real pick-up in that regard… That has a knockon effect on the ability to transact.”

Feliciano adds that whether the US Treasury will renew their lease “is still unknown”, but physical occupancy could be poor due to flexible work arrangements. “There’s more downside than upside risk in the context of the Penn asset.”

To get the best price, however, it may be some time before MUST disposes of any asset. Feliciano hints that management may incur a fee instead. “At the end of the day, US$2 million on a portfolio that’s at US$1.411 billion — if you were taking a basket of sales, even on the US$330 million, it’s essentially a 75-basis point discount to pricing. Is that worth the wait? I would say it’s worth the wait.” 

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