It is out with the old and in with the new for two of Singapore’s three US office REITs — top executives from Manulife US REIT (MUST) and Prime US REIT OXMU announced their resignations within a week of each other, signalling an urgent bid to stem falling valuations and declining unit prices.
On March 15, Prime US REIT’s manager announced the resignation of its CEO, Harmeet Singh Bedi, effective March 31. Bedi will remain as a senior adviser.
He joined the manager in May 2020 as deputy CEO and CFO, leaving his role as CEO of Maybank Kim Eng after nearly six years.
Prime US REIT’s board has appointed Rahul Rana as the new CEO. Rana is a shareholder of the sponsor and owns 40% of the REIT manager. He was a managing director of corporate and investment banking at Deutsche Bank Singapore from 2010 to 2015.
Just four days later, the manager of MUST announced that the entire C-suite would depart on June 30.
In a pre-market bourse filing on March 19, the manager announced the appointment of DWS regional director John Casasante as CEO and CIO.
Casasante will replace current CEO William “Tripp” Gantt and deputy CEO Caroline Fong. He will also replace current CIO Patrick Browne, who is based in the US.
In addition, CFO Robert Wong will make way for Mushtaque Ali, who joins from sponsor Manulife Investment Management.
The four senior leaders announced their resignations concurrently on March 19. CEO Gantt has “pressing family needs that require his full time and attention”, while the other three cited a desire to “pursue other opportunities”.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
Upon regulatory approval, Casasante and Ali will be appointed on April 8 and 12, respectively. Since 2006, Casasante has been the regional director of real estate asset management alternatives and real estate assets at DWS, formerly RREEF. According to his LinkedIn profile, he is based in California.
Meanwhile, Ali is currently the head of finance, Singapore and Southeast Asia at Manulife Investment Management, a role he has held since March 2022. He is based here.
Outgoing CEO Gantt was appointed only in May 2022 to replace MUST’s first CEO, Jill Smith, who retired after six years at the helm. From the REIT’s IPO in May 2016, Smith swiftly expanded the portfolio from three to 12 assets by the end of 2021 through equity fundraising in 2017, 2018 and 2019.
Marc Feliciano, chairman of MUST’s manager, says: “The board is pleased with both John and Mushtaque’s appointments and is confident that their combined experience will help return Manulife US REIT to growth as the US property market evolves.”
Feliciano, who was appointed in October 2023, is also Manulife Investment Management’s global head of real estate and private markets. He adds: “We look forward to their leadership as Manulife US REIT continues to assert its stabilisation and growth plan.”
Coming to terms with FY2023
As of March 19, unit prices for MUST, Prime and Keppel Pacific Oak US REIT (KORE) had fallen 78%, 62% and 72% over the past year, respectively.
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Unitholders have had to swallow a handful of bitter pills throughout FY2023 ended Dec 31, 2023. MUST has halted distributions since 1HFY2023, after it breached a financial covenant due to falling portfolio valuation.
In December 2023, MUST’s unitholders voted to approve a recapitalisation plan and save the REIT from liquidation. However, the plan involves asset sales and a sponsor loan of US$137 million ($183.86 million) at an interest rate of 7.25% a year, with a success fee of 21.1%.
KORE also announced on Feb 15 that it will suspend distributions, citing a technicality in the Code on Collective Investment Schemes. This comes even though its aggregate leverage of 43.2% remains within the regulatory limit of 50%.
Interestingly, KORE’s manager highlighted one of the drawbacks of investing in US office REITs: Their consistent capital expenditure (capex) and tenant incentives, which are funded by debt.
To maintain a high portfolio occupancy and stable net property income, KORE has to continue spending. In 2020, capex was US$26.3 million, or 2.1% of AUM. In 2023, capex was US$45.2 million, or 3.4% of AUM.
Ideally, capex should increase valuation; otherwise, it will be a sunk cost. KORE’s US$45.2 million included adding cafes, changing the air-conditioning and adding sustainability features like solar panels and EV chargers. But to no avail, as valuation fell by 6.8%.
Prime was the only one of the three to propose distributions for 2HFY2023. At 0.25 US cents per unit, the payout is equivalent to about 10% of its total 2HFY2023 distributable income. Prime also announced a one-for-10 bonus issue. As at end-2023, Prime’s aggregate leverage stood at 48.4%.
Is a sea change at the top enough to spur a turnaround for US office S-REITs? UOB Kay Hian (UOBKH) appears bullish, at least on Prime.
In a March 18 report, UOBKH analysts say incoming CEO Rana “was intimately involved in the formation of Prime”. “His experience and network would prove invaluable in steering Prime through the current downturn in the US office market.”
The analysts add that Rana will likely help Prime execute US$100 million of deleveraging this year and refinance US$478 million due in July.
On the other hand, DBS Group Research says Bedi’s resignation “came as a surprise as this is a crucial period for Prime”. “Although Mr Rahul [Rana] is from the sponsor, we raised a concern about whether there could be any conflicts with his appointment.”
While UOBKH has a “buy” call on Prime with a price target of 45 US cents, DBS has a “fully valued” rating with a target price of 7 US cents.
DBS analysts are perhaps equally concerned about MUST’s incoming CFO. In a March 19 note, DBS notes that Ali appears to have been “seconded” by the sponsor, Manulife Group.
Similarly, DBS analysts are surprised that MUST’s “whole C-suite” resigned. “The existing management team has held the helm during the most challenging times… Following the stabilisation of MUST with the recapitalisation plan, a complete change of the C-suite came as a surprise.”
Calling the exits a “complete shake-off”, DBS hopes “the change in management team could see a refresh perception of MUST”. For now, DBS maintains a “hold” on MUST with a target price of 10 US cents.
