Manulife US REIT (MUST) has reported a decline in the valuation of its portfolio to US$1.63 billion ($2.16 billion) as at June 30, 14.6% lower than the US$1.91 billion that was last reported as at Dec 31, 2022.
Following the lowered valuations, the REIT’s aggregate leverage will be around 57%, taking into account fair value changes in investment properties and certain projections in the value of other total assets as at June 30.
While the aggregate limit is above the regulatory limit of 50%, MUST’s limit is not considered to be breached if the limit is exceeded due to circumstances that are beyond the control of the manager, says MUST. However, the REIT is in breach of its financial covenant for its existing loans in that its ratio of consolidated total unencumbered debt to consolidated total unencumbered assets is 60.2:100, above the 60% (or 60:100) limit.
"The manager has commenced discussions with its lenders to seek their waiver for the above-mentioned breach which involves exploring an option which would lower the ratio of consolidated total unencumbered debt to consolidated total unencumbered assets and to discuss plans to address the liquidity needs of MUST to meet its operational, capital and tax needs as well as repay indebtedness," it says.
"The breach of the aforesaid financial covenant in respect of the loans would result in a cross-default of MUST's interest rate swaps. If the banks do not agree to waive the breach of the financial covenants, then as a result of the cross-default provision, MUST may not be able to rely on the interest rate swaps (which have fixed the interest rate), and MUST would thereby be subject to higher interest rates for its loans," it adds.
On options to address the REIT’s liquidity, the REIT manager says that the sale of Phipps Tower to MUST’s sponsor, The Manufacturers Life Insurance Company, will not bring its aggregate leverage below the 50% limit. MUST’s manager had announced on May 24 that it has proposed to dispose of Phipps Tower to its sponsor.
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In light of the “financial covenant situation”, MUST’s manager and sponsor are actively exploring a “potential alternative method” which may work to address the REIT’s mid- and long-term liquidity needs.
“The manager and sponsor have commenced discussions with MUST’s lenders and have specifically included this potential alternative method in those discussions. Any outcome of these lender discussions may or may not result in lenders agreeing to provide relief on MUST’s existing financial covenant thresholds or to support the efforts of the manager and sponsor with respect to MUST,” says the REIT manager.
In addition to other options, the REIT manager is also considering seeking a “disposition mandate” from MUST’s unitholders. The mandate, if pursued, would give the REIT manager more flexibility to dispose of their assets as long as the dispositions meet certain conditions and eliminating the need for the REIT to convene separate general meetings to seek their unitholders’ approval whenever needed.
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“The time required and uncertainty entailed in the extraordinary general meeting (EGM) process makes the disposal of MUST’s properties extremely challenging to attract buyers,” says the REIT manager.
Decline in valuations due to continued weakening of occupancy performance among other factors
Of the total valuation decline, 60.3% of it was attributed to five properties under MUST’s portfolio namely Figueroa, Michelson, Exchange, Penn and Phipps.
Most of the reasons behind the declines were due to higher discount rates and terminal capitalisation rates for certain properties, as well as a continued weakening of occupancy performance across the US office market due to a slowdown in demand and leasing activity.
In addition, office valuations in the US are remaining under pressure and are likely to decline further in 2023, says the REIT manager.
MUST expected to report a loss for 1H2023
As a result of the decline in asset valuations, the REIT manager is expecting to report a loss for the 1HFY2023 ended June 30.
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The loss may have an impact on whether the REIT will be able to declare distributions for the six-month period.
“The manager is in discussions with the lenders to determine whether MUST make distributions as a result of the breach of the financial covenants in the financing documents. It is also determining whether it is able to make the certification as required pursuant to the property funds appendix,” says the REIT manager.
It adds: “If the distributions cannot be declared, this would have an impact on the structure of MUST and would result in additional taxes being required to be paid. The manager is seeking advice from the US. tax advisor, and further details on any potential material impact will be announced in due course as required.”
Units in MUST last traded at 16.9 US cents before its trading halt on the morning of July 17.
