The manager of Manulife US REIT (MUST) accompanied the release of its results for FY2024 ended Dec 31, 2024 with news of another divestment — it would sell 500 Plaza, an office building in New Jersey, for a net consideration of around US$40 million ($53.77 million).
From the divestment, some US$39 million will be used to pay down about 19% of MUST’s 2026 debts. The sale was completed on Feb 25.
Plaza, an 11-storey Class-A office building, was valued at US$43.7 million on Dec 31, 2024. MUST had acquired Plaza for US$115 million in 2017; the move was partly funded by a private placement of some 97 million new units at 83 US cents each, which raised US$80.5 million.
The divestment, at nearly a third of the price MUST had paid, is the REIT’s fourth in recent years. The US office REIT is selling assets as it attempts to lower its gearing and aggregate leverage ratios amid its declining portfolio valuation.
MUST’s portfolio valuation fell 9.3% y-o-y to US$1,137.2 million at end-2024. This is inclusive of Plaza but exclusive of Capitol, which was sold in September 2024 for US$117 million.
MUST had acquired Capitol in 2019 for US$198.75 million — again partially funded by equity fund raising — and the California asset was valued at US$158 million at end-2023 and US$118 million on Sept 1, 2024.
With the sale of Capitol, MUST cleared its 2025 loans last year. Its 2026 loans, prior to divesting Plaza, stood at US$203.9 million. Looking ahead, the REIT has a smaller US$178.8 million due in 2027, a larger US$225.3 million due in 2028 and a US$137 million loan from its sponsor due in 2029.
June divestment target
See also: Asset disposals ‘worth the wait’, even with penalty fee: MUST chairman
Despite the sale of Capitol last year, MUST missed a target under the terms of its recapitalisation plan and master restructuring agreement (MRA) to raise net sale proceeds of US$230 million by end-2024. Hence, it incurred a US$2.28 million fee, which was booked under finance expenses in FY2024.
Now, MUST faces a US$328.7 million 2025 net proceeds target under the MRA, which is inclusive of the US$230 million it missed last year. Unlike the 2024 target, however, this is due June 30 this year.
John Casasante, CEO of the manager, says his team is aiming to repay all US$203.9 million due in 2026. This, combined with the fully-paid US$130.7 million due in 2025, will total nearly US$334 million, satisfying the 2025 target.
With the US$39 million from divesting Plaza, the challenge now is to raise the remaining 81% of US$203.9 million. Casasante says his team is “in talks” to divest “several assets”. “June 30 is roughly 4½ months away, so we are continually working towards meeting our debt repayment obligations.”
Should MUST fail to meet this target, the resulting breach will require a waiver by majority lenders if the shortfall is less than 15%, or by all lenders if the shortfall is more than 15%.
Three tranches
When the MRA was first introduced ahead of an extraordinary general meeting in December 2023, MUST divided its assets into three tranches. Tranche 1 assets are prioritised for divestment. These are Centerpointe, Diablo, Figueroa and Penn.
For more stories about where money flows, click here for Capital Section
Half of MUST’s Tranche 2 assets — Capitol, Exchange, Peachtree and Plaza — have already been sold. Under the terms of its MRA, “not more than two” assets from Tranche 2 may be sold to satisfy the cumulative net sale proceeds. This means MUST is likely to focus on shedding its Tranche 1 assets next.
“By virtue of being put in Tranche 1, [an asset was indicated to be] lesser of an asset compared to Tranche 3,” says Casasante in response to The Edge Singapore, “so it’s no surprise that the undervaluing, underperforming Tranche 1 assets don’t have liquidity.”
He explains that transaction activity for similar buildings is sparse in the submarkets where the four assets are located: Virginia (Centerpointe), Tempe (Diablo), Los Angeles (Figueroa) and Washington, DC (Penn).
Casasante says US office transactions and leasing are “still recovering”, but even as things pick up, MUST’s Tranche 3 assets — Michelson, located in Irvine; and Phipps in Atlanta — should “improve quicker”, followed by assets in Tranche 2.
Michelson and Phipps, the only two Trophy assets in MUST’s portfolio, are also the newest. Michelson was valued at US$219.5 million on Dec 31, 2024, while Phipps was valued at US$180.2 million.
The Tranche 2 assets are comparable: Exchange was valued at US$211.6 million while Peachtree was valued at US$164.6 million.
To recap, MUST needs to raise another US$164.9 million by June 30.
MUST’s disposition mandate covers all three tranches, but under the MRA, management would need approval from all lenders if it were to sell a Tranche 3 asset.
“Nothing is completely off the table,” says Casasante. “It would be much more challenging, but our goal is recovery; our goal is growth. Our number one objective is to have the unitholders’ best interest in mind… It would be more complicated for us to do something in Tranche 3, but again, you know, we’re not excluding it. We’re looking at everything from a very holistic standpoint.”
Analysts’ reactions
Following the Feb 20 results briefing, CGS International Research analyst Lock Mun Yee slashed her target price on MUST to 13 US cents, down from 22 US cents previously.
That said, Lock is keeping “add” on MUST, saying its current valuation of 0.39 times FY2024 price-to-book (P/B) ratio “has factored in much of its operational and financial challenges”, including the near-term overhang from “uncertainty” over the recapitalisation plan and “challenging prospects” of the US office market.
Meanwhile, DBS Group Research analysts Derek Tan and Dale Lai are maintaining “hold” on MUST with an unchanged target price of 10 US cents. They “take a more cautious stance for now” as MUST has paused distributions since 1HFY2023.
Charts: MUST
