I used to hold all the US office REITs of Manulife US REIT ("MUST"), Keppel Pacific Oak REIT ("KORE") and Prime US REIT ("PRIME") listed on SGX. Post COVID, all 3 REITS imploded in varying degree due to the work from home trend. I have then sold off the weakest 2 commercial REIT of MUST and PRIME and allocated the funds to KORE which I thought held the strongest balance sheet relative to the other 2 to mitigate the risk of bankruptcy while waiting for the US office market recovery. I thought that Dividend Uncle's recent interview with the new MUST CEO and his analysis on it are quite interesting, do take a look at his
post here.
1. MUST Debt Restructuring On Track
Basically, MUST selling off of properties are on track to meet the debt restructuring plan imposed by the bankers. The only tragic part is that Donald Trump's import tariff imposition led to sudden uncertainty in the business environment and led to a 19% discount to net book value of Peachtree office building but nevertheless, this is still higher than the current market price of US$0.161 per unit of MUST which is just a fraction of its net asset value per unit.
Nevertheless, the same storyline of huge potential upside of 100% to 200% for the 3 US Office REITs which are trading at record low to their net asset value per unit hid a a major issue that has often been neglected and forgotten which I will elaborate below.
2. My Beef with US Commercial Office SREITS
The often forgotten issue is that during times of crisis, US Commercial Office SREITs are unable to tap onto its sponsors or existing unit-holders to raise much needed funds to survive the crisis.
The major hurdle is the problem of the complex holding structure designed to minimise withholding tax in the rental return to unit-holders. The sponsors are unable to underwrite the rights issue during crisis time as their own unit-holdings will exceed 9.8%- please see my
previous post on the technicality here.
(i) So far, one of the solutions we seen during such crisis time is the selling off of office building at fire sales price for MUST and PRIME. KORE also announced in 2025 the sales of non-core assets. This is not exactly an ideal solution and as a matter of fact a really bad move.
(ii) The other solution is private placement to 3rd parties at extremely dilutive pricing. MUST tried that but failed in the face of institutional investors protest at the grave dilution for existing unit-holders.
(iii) A 3rd fund raising solution will be as per what KORE has done- it has suspended all distribution to unit-holders from 2023 to 2025 and only resume pay-out in 2026 subject to improvement in US commercial office space conditions. The retained distributions is akin to a forced rights issue where everyone will need to contribute thus circumventing the issue of non-subscription which will cause breach of the more than 9.8% individual threshold allowance.
Parting Thoughts:
While current US office REITs seemed very much undervalued, my personal thoughts are that retail investors may seriously need to consider whether it is worth holding on to a ticking-time bomb (due to market cycle) or to consider an exit strategy once the price recovery plays out.
