Manulife US REIT’s (MUST) new management hit the ground running, fronting the US office REIT’s Aug 5 results briefing for 1HFY2024 ended June.
Effective June 30, John Casasante is the new CEO and CIO of the manager. Mushtaque Ali, from sponsor Manulife, is the new CFO of the manager. They replace four members of the REIT’s previous management team.
The duo are a rescue team of sorts, joining the manager as it implements the first of a three-phase recapitalisation plan, which the REIT’s unitholders approved at an extraordinary general meeting in December 2023.
One of the three resolutions passed provides the manager and lenders with the authority to divest “non-core”, “Tranche 1” properties. A circular dated Nov 29, 2023 identified four Tranche 1 assets in MUST’s portfolio, which may be up for sale: Centerpointe, Diablo, Figueroa and Penn.
The manager said during a 1QFY2024 results briefing it is targeting asset sales of some US$100 million ($132.59 million) “by 2Q2024 or 3Q2024”. While Casasante confirms that his team is “marketing three properties for sale”, he now says the divestments should happen “by year-end”. “Maybe we [will] pleasantly surprise people”.
The manager is also showing a fourth asset to prospective buyers, says Casasante. “We currently have another property that is being marketed off the market, and we’ve had some off-market tours of our assets as well.”
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Interested parties include high-net-worth investors, according to Casasante. However, he sidestepped questions from The Edge Singapore about which of the REIT’s 10 remaining assets are up for sale. “Any comments that I make on any specific asset would undermine those efforts and ultimately hurt the negotiation process, which would ultimately lead us to a lower purchase price.”
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.
Among the four Tranche 1 assets, Figueroa looks the most likely to be divested. Completed in 1991, the 35-storey Class-A office building in Downtown Los Angeles has been in the portfolio since MUST’s IPO in May 2016, and it has seen the largest decline in net property income (NPI), falling 85% y-o-y to US$0.7 million in 1HFY2024. The manager attributes this to the exit of US asset management firm TCW Group, whose lease for some 189,000 sq ft expired on Dec 31, 2023.
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As at June 30, Figueroa’s occupancy rate was 53.5%, by far the lowest among MUST’s assets. Its property value, last appraised on Dec 31, 2023, was US$139.0 million, placing sixth among MUST’s 10 properties.
Figueroa’s fellow Tranche 1 assets, Centerpointe and Penn, posted 40% and 3% lower NPI y-o-y in 1HFY2024. Both are likely to also be on the chopping block.
The fourth asset, Diablo, is an aberration — it posted 14% higher NPI y-o-y to US$3.3 million in 1HFY2024, but it is also the only Class-B property in MUST’s portfolio and the smallest by valuation, at US$52.0 million.
The five-building office campus in Tempe, Florida, was acquired in December 2021 — two CEOs ago — alongside Tanasbourne and Park Place, which were sold in April 2023 and December 2023 respectively.
Notably, Diablo now has the shortest weighted average lease expiry (WALE) by net lettable area (NLA), at just 1.9 years. Other assets with the shortest WALE are Penn (2.6 years), Centerpointe (3.1 years) and Figueroa (4.0 years) — all likely Tranche 1 divestments. Together, Tranche 1 assets account for 66% of expiries in the remainder of 2024 and in 2025.
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Getting tenants at lowest cost
MUST posted income available for distribution of US$22.9 million for 1HFY2024 ended June 30, 39.8% lower y-o-y. That said, MUST has halted distributions until end-2025.
In 1HFY2024, MUST recorded gross revenue of $86.7 million, down 12.9% y-o-y; and 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. Same-store 1HFY2024 gross revenue was down 8.1% y-o-y while NPI was down 16.7% y-o-y.
Around 80% of MUST’s debt is hedged, and its new policy is to keep 50%-80% of debt hedged on the expectation of interest rate cuts. 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.
MUST’s priority is getting tenants in the space “at the lowest cost of entry”, says Casasante. 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. The bulk of leases signed comprised renewals (75.8%), while new leases made up 13.8% and expansions the remaining 10.4%.
The largest lease signed was for Amazon, the anchor tenant at Exchange in Jersey City, New Jersey, and one of MUST’s top five tenants. Prior to the renewal, its lease had been due to expire in April 2025. Rent reversion for the 1HFY2024 leases was at negative 10.6%. RHB Bank Singapore’s Vijay Natarajan believes the Amazon lease extension was a drag.
With distributions halted and the recapitalisation plan in place, quarterly financial metrics are perhaps becoming secondary to the manager’s leasing and divestment priority.
A key consideration for disposition will be the need for incremental capital to be spent on the asset versus potential returns. Casasante says: “In some situations, some of that leasing activity lines up with sale candidates, and we are also angling that to line up [so] we can deliver a potential sale opportunity with a lease or two in hand, and let the next buyer make the decision if they want to pay for it or not, without us [paying] for that capital.”
Some sub-markets have a “long road to recovery”, he adds. “Even recovery isn’t necessarily worth spending US$50 million [on]. So, it just depends on what’s going on in each market.”
Sale to come?
While it is unclear how far talks have progressed on any potential divestment, the manager could still make good on its previous 3QFY2024 deadline for at least one sale.
According to Casasante, an all-cash buyer could take 30 days for its due diligence process and another 10 days to close the deal. If debt is involved, the buyer could take “30 plus 30” days, “and maybe another 30 [days] as an option”, he adds.
Some analysts think the manager is a month away from announcing a sale, but Casasante is keeping quiet on the matter.
A lot of things come into play when assessing potential buyers, says Casasante. “If one person’s price is significantly higher than someone else’s, maybe you’ll make a business decision to roll the dice a little bit and go [down] that route. If you have an all-cash buyer that’s [offering] just slightly less, again, liquidity comes at a price — you may choose to go with an all-cash buyer and have no risk.”
Unitholders may be focused on Tranche 1 assets, but Casasante says this classification was created “back in December [2023]” and is tied to the master restructuring agreement.
Post-divestment, when the recapitalisation plan progresses past phase two and into phase three — “recovery”, then “growth” — the “tranche concept is gone”, he adds.
Tranches are “just a snapshot at a moment in time”, says Casasante. “I can guarantee you — some of these [assets] that look positive aren’t really positive. We look at it from a broader spectrum: how it sits in the market, potential market growth, from rents to capital markets, to liquidity. We also see downstream the capital that needs to go into these assets.”
He adds: “Mushtaque and I did not create this list, but it is a list that we do think has a lot of validity… If something’s in Tranche 2 and it becomes a good performer, could it get moved to Tranche 3? Sure. But what we’re really saying here is this was something that was set in place as it relates to dispositions.”
Ali paints a rosier picture ahead for the REIT. “As we look to the future, as we execute on our strategy [and] we dispose of assets — if you have to take some message out of this: our future earnings will not be as depressed as what we see in this first half of the year.”
Tables: MUST
