MUST sold its Capitol and Plaza assets in October 2024 and February this year, respectively. The manager expects to close the sale of Peachtree, its latest divestiture, by June 30, which is expected to net proceeds of approximately US$118.8 million.
Under a master restructuring agreement (MRA) that was first announced in December 2023, MUST was required to achieve minimum cumulative net sales proceeds of US$328.7 million by June 30. The manager says the six-month extension gives it “time to maximise opportunities to sell Tranche 1 assets”, but the extension is conditional on the completion of the sale of Peachtree.
Which asset will go next?
When introducing the MRA, MUST divided its assets into three tranches. Tranche 1 assets are prioritised for divestment. These are Centerpointe, Figueroa, Diablo and Penn.
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By a process of elimination, the latter asset appears to be ripe for divestment, based on management’s comments at a May 26 briefing on MUST’s results for 1QFY2025 ended March 31.
Firstly, MUST signed a new 29,000 sq ft lease with a real estate group at Centerpointe in Virginia during the quarter. As at March 31, Centerpointe is three-quarters filled, with an occupancy of 75.1%.
Next, CEO and CIO of the manager John Casasante says talks are ongoing for a “two-floor deal” at Figueroa, “which will probably get signed in the next two to four weeks”.
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Management also recently signed a “full-floor early renewal” with a tenant for three years at the Class A asset in Los Angeles after 1QFY2025. This should bring Figueroa’s occupancy up from 45.4% as at March 31, the second-lowest among MUST’s assets.
Another Tranche 1 asset, Diablo, is “still a challenging market right now on the leasing front”, says Casasante, who took over on June 30, 2024.
Located in Tempe, Florida, Diablo was designed to serve as back offices for call centres, adds Casasante, and tenants opted not to renew their leases there after Covid-19, allowing their staff to work from home instead.
As at March 31, Diablo’s occupancy is the lowest among MUST’s assets, at 37.8%, with just seven tenants.
But two “trade schools” could be keen on entering MUST’s only Class B asset, says Casasante. “One of them is a welding company, so we’re determining if there’s enough power to accommodate their use; and then the other company that we’re negotiating with is heating and cooling, which we call HVAC, so that would be another trade school. Roughly, each one of those uses about 35,000 to 45,000 square feet. We’re currently trying to see if there’s a fit for them to lease at Diablo.”
That leaves Penn in Washington, D.C., which is also the oldest asset in MUST’s portfolio, completed in 1964.
While occupancy stands at 90% as at March 31, MUST’s only asset in Washington has just seven tenants.
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One of these — the US Treasury — occupies nearly half of the net lettable area, at 120,324 sq ft, out of a total of 278,063 sq ft.
The US Treasury contributes approximately 4.6% of MUST’s gross rental income (GRI), ranking sixth among its tenants overall, and its lease is set to expire in August.
Casasante says the US Treasury is not renewing its lease. “They have leased another space. However, we know their other space is not ready yet for them to move in, and we have had some early discussions with them about a potential short-term extension, which we’re still further refining.”
In response to The Edge Singapore, Casasante says federal tenants “typically do 12-month extensions” where the first six months are “firm”, then the tenant “has the ability to go month to month up to 12 months”.
However, it is still “too soon to formalise those conversations” with the tenant, he adds.
Outside of this short-term extension, however, Casasante says “there’s no new leasing going on at the moment” at Penn, which also houses the United Nations (UN), MUST’s third-biggest GRI contributor. The UN’s lease for 94,988 sq ft of space runs until December 2028.
“If you look at this entire list, the only asset that we’re not trading paper, [with no] proposals going back and forth, would be at Penn right now,” adds Casasante.
Penn was last valued at end-2024 at US$79.1 million, which is above MUST’s US$60 million shortfall. Peachtree, however, was sold some 18% below its end-2024 valuation of US$164.6 million.
Casasante did not confirm whether management will appraise the value of its entire portfolio at end-1HFY2025. “We’re still running it through our internal process,” he adds.
Next steps
In addition to proceeds from the Peachtree sale, MUST will use US$25 million of cash to partially pay down debts due in 2026, 2027 and 2028. This still leaves some US$35.6 million due in 2026, US$170.3 million in 2027, and US$216.2 million in 2028.
Interestingly, Casasante says the “surplus” from divesting a Tranche 1 asset could be used for “further strategic leasing to shore up further our occupancy” and potentially, an acquisition.
Pressed by The Edge Singapore, Casasante says this could be a “less capital-intensive product” like industrial or multi-family assets. “We’re looking for assets that require less capex and will, in the medium to short term, see better appreciation than office.”
Given the “size of the overall REIT”, however, Casasante says he “wouldn’t envision it being a huge acquisition”. “It never hurts to diversify risk into a couple acquisitions versus putting it all into one building.”
The REIT will only consider assets within the US, he adds.
Divesting everything?
MUST announced on May 11 that it is selling Peachtree for US$133.8 million, more than 18% below its Dec 31, 2024 valuation of $164.6 million.
According to presentation slides released May 23, the net sales proceeds from the Peachtree divestment is expected to increase from the US$118.8 million figure announced earlier, “due to a reduction in seller’s credit”.
Assuming these proceeds, along with US$25 million in cash, were used to repay US$146 million of outstanding loans on March 31, MUST’s aggregate leverage would fall to 56.3% on a pro forma basis.
This is above the Monetary Authority of Singapore’s (MAS) guidance of 50% aggregate leverage for S-REITs. MUST’s pro forma interest coverage ratio of 1.7 times is above the 1.5 times level mandated by MAS.
Mushtaque Ali, CFO of the manager, says: “We have seen some green shoots in our valuations, which will help with the aggregate leverage. [For] our aggregate leverage to come down to 35%-40% will be a longer way for us. It will require significant recovery in the values of the assets as well.”
As at March 31, MUST’s pro forma debt, after using Peachtree’s net proceeds to repay loans, is approximately US$559.1 million.
The valuation for the remaining assets in the portfolio based on Dec 31, 2024 values is around US$928.9 million. To achieve an aggregate leverage of 40%, valuations would need to rise by approximately 40%.
Given the immense challenge facing MUST, would management consider divesting all assets and returning capital to unitholders? Casasante says: “That has not been part of our conversation.”
Tables: Manulife US REIT
