The million dollar question revolving around Manulife US REIT ("MUST") unit-holders recently is whether to dump all holdings or continue holding on to it. MUST's unit price has been nothing short of a major disaster with an -80% plunge over a year. It does not help that the commencement of a "Strategic Review" in November 2022 lead to no concrete solution out of this exercise despite the huge lead time to find an alternative way out of the mess created by over aggressive acquisition of office buildings by the previous management team. Adding to the woes of MUST, the persistent low physical office occupancy rate in US and high interest rate environment drastically reduces its valuation and now spiralled into breaches of bank covenants and an existential crisis.
Should a Unit-holder of MUST Dumped All His/Her Units Immediately Or Continue Holding?
Note that this is a personal opinion piece so please do your own due diligence and assessment. Personally, I am extremely frustrated at the current predicament facing MUST. Let us not mince our words: Things are certainly not bright and MUST is in a deep Sh-hole. The breach of the bank covenants will trigger off various adverse consequences and we are only starting to see some of them materializing:
1. Inability to pay out distributions to Unit-holders without express authorisation of the bankers as loans are considered to be all in default. (Also, I am not optimistic on the strange request by MUST to ask for waiver to pay out distribution- if I am the banker, no way will I allow cash to be paid out as the banks will need to ensure the business have sufficient cashflow to pay them back in event things took a turn for the worst.)
2. Additional taxes to be incurred as alluded to point 1. This inability to pay out distribution will trigger off additional taxes due to the tax planning structure of the US REIT put in place.
3. Fixed interest rate swaps default to the breach. This will lead to high interest rate expenses.
Other Consequences That We Have Not Seen But Which Maybe Upcoming:
(i) Doubling of interest rate expenses in even of worst defaulting event. Many term loans terms and conditions come with these to ensure maximum recovery by the bankers to protect their own interest;
(ii) Additional costly professional fees such as lawyer and financial consultancy will be required to rehabilitate the finance position. Liquidation fees may also be incurred if this is still not resolved;
(iii) Prospective tenants may also lose confidence in MUST as a landlord as dire financial stress means that the landlord may not even have the money to continue with basic maintenance. It becomes a vicious cycle in terms of having less and less rental revenue.
Slow Reaction of The Sponsor And Management Team
The sales and disposal of a major building till now has not been concluded. There is great reluctance also to conduct a rights issue as the Sponsor is worried that it will end up paying lots of withholding tax during distribution of payout if it ends up with 10% or more stakes. MUST management worries about "this and that" to find a "perfect" solution is the Achilles heel of the current MUST management team. They need to also ask themselves how much money had they spent so far hiring the "financial advisor" for strategic review and yet nothing much comes up timely to save MUST from its worsening predicament. Compare MUST to Keppel Pacific Oak US REIT ("KORE") and one can see the major differences- KORE just announced its 1H 2023 results and it still has ample aggregate leverage before hitting the 50% mark (sufficient to take a 24% hit in its property valuation). KORE also reported a respectable set of 1st half numbers amidst the challenging US office environment and its earlier entry into growing cities such as Nashville, Dallas, Houston, Denver and Eastside Seattle.
Parting Thoughts
Personally, as discussed above, I see a lot of down sides in terms of MUST's ability to navigate itself out of this financial mess. I think I will be selling off part of my stakes in MUST to reinvest the proceeds while their management team try to save its business from collapsing. I will probably still be retaining half of my current stakes- not because I think the upsides are more than the risks but rather, my current holdings in MUST has diminished to just a paltry S$10K.
No comments:
Post a Comment