After covering Prime US REIT and Keppel Pacific Oak US REIT over the past couple of weeks, it only makes sense to now turn our attention to Manulife US REIT (SGX: BTOU), or MUST, which also focuses on US office properties.
In fact, among the 3, MUST was the first to be listed, debuting in May 2016 as the very first pure-play US office REIT in Asia.
MUST’s IPO was priced at US$0.83 per unit, and its price climbed to a peak of US$1.08 in January 2020. However, at the time of writing, its unit price has plummeted by close to 90% to around US$0.121.
With interest rates expected to drop to around 3% by the end of 2026, along with more US companies requiring employees to return to the office, the REIT might stand to gain. But does that make now a good time to reconsider it?
In this post, similar to my reviews of the other 2 US office REITs, I will provide an in-depth look at MUST’s business operations, financial performance, portfolio occupancy, debt profile, and distribution payouts over the past five years, which I hope will give you a better understanding about the Singapore-listed REIT at the end of it.
Let’s dive in!
Brief Introduction of Manulife US REIT
MUST focuses on investing in office properties located in major U.S. markets, as well as other real estate assets.
As of 31 December 2023, its portfolio consists of 10 freehold office properties situated in Arizona, California, Georgia, New Jersey, Virginia, and Washington, D.C., with a combined valuation of US$1.4 billion.
Financial Performance
MUST has a financial year ending every 31 December.
The table below provides a summary of some key financial figures reported by the US office REIT over the past five years (2019–2023):
2019 | 2020 | 2021 | 2022 | 2023 | |
Gross Revenue (US$’mil) | $177.9m | $194.3m (+9.3%) | $185.1m (-4.7%) | $202.6m (+9.4%) | $208.0m (+2.7%) |
Net Property Income (US$’mil) | $110.8m | $115.8m (+4.6%) | $109.5m (-5.4%) | $113.2m (+3.3%) | $114.6m (+1.3%) |
Distributable Income (US$’mil) | $83.3m | $89.0m (+6.8%) | $85.6m (-3.8%) | $87.9m (+2.7%) | $74.3m (-15.5%) |
MUST’s financial performance saw a decline in 2021, with gross revenue, net property income, and distributable income dropping by 4.7%, 5.4%, and 3.8% year-on-year, respectively. This was primarily due to higher rental abatements, lower car park income, and reduced rental income from vacancies.
Despite the challenges in 2021, both gross revenue and net property income recorded year-on-year growth in the other 4 years, achieving a compound annual growth rate (CAGR) of 3.2% and 0.7% over a 5-year period, respectively.
It is also important to highlight the 15.5% decrease in distributable income to US$74.3 million in 2023, driven by higher vacancies, lower rental and recoveries income, increased property expenses, rising finance costs due to higher interest rates, and the divestment of Tanasbourne in April 2023 and Park Place in December 2023, with the proceeds used to pare down debt.
Distribution Payout to Unitholders
The management of MUST declares distributions to unitholders on a semi-annual basis.
Over the past 5 years, the distribution per unit (DPU) has been as follows:
2019 | 2020 | 2021 | 2022 | 2023 | |
DPU (US$) | $0.0596 | $0.0564 (-5.4%) | $0.0533 (-5.5%) | $0.0475 (-10.9%) | – (N.M.) |
MUST’s distribution payout has shown a steady decline over this period, with no distributions declared for 2023.
The absence of a distribution in the first half of 2023 was primarily due to two key factors: First, the REIT breached a financial covenant in its loan agreements after its portfolio valuations dropped by 14.6%, causing its aggregate leverage to exceed the 50% regulatory limit. This breach led to all of its loans being reclassified as current liabilities. Second, the REIT’s management was unable to confirm its ability to meet its liabilities if a distribution was made.
For the second half of 2023, distributions were suspended due to the REIT’s ‘Recapitalisation Plan’, announced on 29 November 2023, and approved at an extraordinary general meeting on 14 December 2023. Under this plan, distributions will be suspended until 31 December 2025 unless certain ‘Early Reinstatement Conditions’ (aligned with Monetary Authority of Singapore’s regulatory limits) are met.
Additionally, the plan includes the divestment of Park Place to its Sponsor for US$98.7 million, along with securing a 6-year unsecured loan of US$137 million at a 7.25% interest rate (with a 21.16% exit premium) with 100% of the proceeds used to pay each lender, together with the disposal of one or more properties to raise at least US$328.7 million to repay debt by maturity, fund for capital expenditures, as well as portfolio optimisation.
Portfolio Occupancy Profile
Let us now take a look at MUST’s portfolio occupancy over the past 5 years (between 2019 and 2023), as shown in the table below:
2019 | 2020 | 2021 | 2022 | 2023 | |
Portfolio Occupancy (%) | 95.8% | 93.4% | 92.3% | 88.0% | 84.4% |
Portfolio WALE (%) | 5.9 years | 5.3 years | 5.1 years | 4.7 years | 5.0 years |
In 2023, the top 10 tenants contributed 35.1% of the REIT’s gross rental income, with the largest tenant, The William Carter Co., accounting for 4.8%.
Over the last 5 years, MUST’s portfolio occupancy has consistently declined, dropping from 95.8% in 2019 to 84.4% in 2023.
Among its 10 properties, 2 have occupancy rates below 80% – Peachtree (78.9%) and Phipps (78.8%) in Atlanta. The remaining 8 properties have their occupancy rates above 80%, with Diablo in Tempe achieving the highest occupancy at 93.7%.
Regarding the lease expiry profile, 21.6% of leases are set to expire in 2024 (of which, 6.2% of leases have expired in 31 December 2023). On average, 8.7% of leases are due for renewal annually between 2025 and 2027, while 52.3% of leases will expire in 2028 or later.
Debt Profile
The table below is a summary of MUST’s debt profile over the past 5 years:
2019 | 2020 | 2021 | 2022 | 2023 | |
Aggregate Leverage (%) | 37.7% | 41.0% | 42.8% | 48.8% | 58.3% |
Interest Coverage Ratio (times) | 3.8x | 3.5x | 3.4x | 3.1x | 2.4x |
Weighted Average Interest Rate (%) | 3.37% | 3.18% | 2.82% | 3.74% | 4.15% |
The most notable point is the significant increase in aggregate leverage to 58.3% in 2023. This was largely driven by an 8.0% decline in portfolio valuation, influenced by higher average discount and terminal capitalisation rates. These changes reflect broader market and property-level risks, including reduced debt availability, net selling of US office assets, weak fundamentals in submarkets, higher vacancy rates, and increased leasing costs due to sluggish leasing activity across the US office market.
However, its important to note that this increase in aggregate leverage, caused by a decline in portfolio valuation, is not considered a breach for MUST. However, it does limit the REIT’s ability to take on additional debt. As a result, the REIT will need to cover capex, tenant improvement allowances, and leasing costs using available cash, operational cash flow, or proceeds from asset dispositions.
In terms of debt maturity, 5.4% of the REIT’s borrowings are due in 2024, with repayment scheduled by 31 March 2024. Between 2025 and 2027, roughly 18.5% of borrowings will be due for refinancing each year, while the remaining 39.1% will mature in 2028 or beyond.
Finally, it’s worth mentioning that as of 31 December 2023, MUST had 91.3% of its loans at fixed interest rates, providing some protection against rising rates.
Closing Thoughts
The biggest challenge facing MUST at the moment is its ‘Recapitalisation Plan,’ which includes the suspension of distribution payouts until the end of 2025. Additionally, the REIT will need to sell off more properties to raise funds for debt repayment, capital expenditure, and portfolio optimisation.
On the latter point, the divestment of properties could negatively impact the REIT’s financial performance. By the time distribution payouts are reinstated in 2026, the amount may be significantly lower compared to the last full distribution in 2022.
This is a key consideration for retail investors before making any investment decisions about the REIT.
On a positive note, the REIT’s financial performance over the last 5 years, particularly in terms of its gross revenue and net property income, have remained relatively stable. While portfolio occupancy has declined over the past five years, it stood at 84.4% in 2023. Though not ideal (I personally prefer REITs that manage to maintain their occupancy rates above 90.0%), it is still a respectable figure.
That concludes my review of Manulife US REIT. I hope this post has provided you with a comprehensive understanding of this Singapore-listed REIT. Please remember that the information shared here is for educational purposes only and should not be considered financial advice. You are strongly encouraged to conduct your own researches before making any investment decisions.
Disclaimer: At the time of writing, I am not a unitholder of Manulife US REIT
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