Republicans tend to be “more pro-business”, while Democrats “like to build the government and create more layers”, says John Casasante, CEO and CIO of the manager of Manulife US REIT (MUST).
“A pro-business party like the Republicans are going to want to jumpstart the economy and pull whatever levers they can within the government to move things in a more of a growth point,” says Casasante in a Nov 6 briefing on MUST’s results for 3QFY2024 ended Sept 30.
Still, things will not “improve overnight”, he adds, and the US Federal Reserve’s 50 basis point (bp) rate cut in September “really didn’t change anything”.
“The most critical things that we need are: we need back-to-office [work arrangements], we need more liquidity in the markets [and] the banks need to start lending [to] offices again. Those are going to be the biggest improvements that are going to help us,” says Casasante.
‘One more disposition’ before year-end
MUST announced in September the divestment of Capitol in Sacramento, California for US$117 million ($155.70 million), below the property’s value of US$118 million as at Sept 1. The manager has used proceeds from the divestment, along with existing cash, to fully repay US$130.7 million of outstanding loans maturing in 2025 while lowering its gearing from 58.2% to 54.3%.
See also: Asset disposals ‘worth the wait’, even with penalty fee: MUST chairman
Under a Master Restructuring Agreement (MRA) signed with lenders in December 2023, MUST is obliged to raise a minimum of US$328.7 million through asset divestments by June 30, 2025.
MUST also has a 2024 disposition target of US$230 million, and the REIT is currently “falling short of that target” even after selling Capitol, says Mushtaque Ali, CFO of the manager.
If no further divestment happens before Dec 31, MUST would trigger a financial penalty estimated at some US$2.3 million, according to Ali.
See also: Manulife US REIT aims to cut borrowings by US$200 million in 2025
Technically, MUST faces the higher of two fees: either 1% of the shortfall from the sales target or a 75bps increase on the outstanding loans of US$738.7 million. Prior to the divestment, Ali had said in May that US$2.8 million is the “maximum” penalty that MUST could be exposed to this year.
Still, Casasante says “it’s possible to still accomplish one more disposition before the end of the year”.
Two of the REIT’s nine remaining properties are on the market, and Casasante says “one of the buildings that we're in discussions on potentially has a timeline that could accomplish” that end-2024 target. “We’ll just have to kind of see how things play out over the next couple of weeks.”
Red vs blue
Following the divestment, MUST’s portfolio consists of nine office properties in the US, located in Arizona, California, Georgia, New Jersey, Virginia and Washington, D.C..
During the call, RHB analyst Vijay Natarajan noted that MUST’s assets are mostly in “blue” states, or states that historically voted for the Democrats. According to the Associated Press’ 2024 US presidential election updates, five of MUST’s properties are in “blue” states, while four are in “red” states.
“Just within our own various real estate portfolios, typically assets that are in red states have done better than assets that sit in blue states. And so I think at a high level, there may be a slight advantage to a red state over a blue state,” says Casasante, who was appointed in April. “Democrats typically spend more money and impose more tax. Republicans are typically more business-friendly, [impose] less taxation and try to grow the economy through stimulating things that would drive businesses.”
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In response to queries by The Edge Singapore, Casasante adds: “You can make an argument [that] if the Democrats are in office, then the D.C. market may do better because of the expansion that Democrats will do within sort of the government layers.”
MUST’s Penn asset is located in Washington, D.C. Two of the US office S-REIT’s four largest tenants by gross rental income (GRI) have leases in that asset.
The United Nations (UN) has a lease for 94,988 sq ft of net lettable area (NLA) expiring December 2028, and it contributed 3.8% of MUST’s GRI as at Sept 30.
The US Treasury occupies 120,324 sq ft of NLA with a lease that will expire in August 2025. It contributed 3.6% of MUST’s GRI as at Sept 30.
“As it relates to Republicans, they like to trim things down and make it more efficient,” says Casasante as the US tallies nationwide votes for its House of Representatives, Senate and President. “But typically, that efficiency will ultimately help us on the real estate side too, having a group that is more pro-business.”
Still, Casasante acknowledges that the US president does not make “independent decisions”. “Things still have to go through Congress.”
He adds: “Nothing is going to change things for us dramatically with either president, but anyone that can help the economy move in the right direction, to allow more liquidity amongst banks for office lending, clearly, some additional interest rate cuts will also help. I don’t think you're going to see a difference between the Republicans or the Democrats as it relates to interest rate cuts.”
Table: MUST
