Manulife US REIT ("MUST") has seen its unit price diving from US$0.708 to US$0.375 in over a year. This is a whopping <47%> slump in its market price. US office REITS (MUST, Keppel Pacific Oak & Prime REIT) had all previously held up extremely well during the COVID 2020-2021 lock-down crisis but lately, their unit price had all plummeted and is offering an enticing 14% high distribution yield (as per StocksCafe). What is happening to US commercial office sector? While today's higher interest rate environment as well as concerns over implication of new withholding tax rule played a part in contributing to its downfall, there is another critical unresolved issue on hand which I should elaborate further below.
1. Physical occupancy is well below 50% and at some US offices, just 33% had returned to office
While MUST reported that its overall occupancy for the recent period is 88.1% (down from 90% recorded as at end of 1H 2022), another more interesting indicator is the "physical office occupancy". The office scene in US is in stark contrast to the state in Singapore-it was reported that in some states, only 33%+ workers are physically back office with most still working remotely from home. In Singapore, most workers are already back office and you can tell from the many folks squeezing onto our MRT and buses rushing to work in the morning and the large crowd making their way home after work on public transport in the evening.
Just to side track, I saw that a number of folks use positive rental reversion as an indicator to justify that things are still looking well for US office REITs. I am skeptical on this as the positive rental reversion seems more of to do with inflation rather than directly linking to improved take up rate of office space hence not a direct reflection of the dire state of office rental market.
As at 12 October 2022, it seems that this number has gone up to 47.8 percent in places like New York. The numbers would probably go up further as CEOs of US companies are increasing their mandatory return to office mandate. Nonetheless, it appears that some form of hybrid working arrangement is here to stay post-covid lockdowns in US hence the demand for working space will no longer be as robust as 3-4 years ago. Apparently, this is a permanent shift in US office usage trending.
Tripp Gantt, CEO of MUST’s manager, had announced in Aug 2022 that MUST will join the bandwagon of "hotelisation" of some of its office assets to adapt to the new realities that have arisen at the workplace, especially post COVID-19. What this means is that MUST will give options for more flexible use of its office space as well as provide curated experiences like having gyms for office tenants.
Personally, I am not sure how this hotelisation strategy will turn out. I can only conclude that in US, there is a drop in physical office space required and this trend seems permanent in nature, hence MUST and other US office REITs are definitely fighting headwinds.
3. MUST launches self introspection over its mandate as an office only REIT
In November 2022, Mr Tripp Gantt disclosed that MUST has commenced an introspection process within MUST as part of its efforts to rejuvenate its business operations. This provides strong hint that MUST management may soon diversify into other asset types besides office buildings acquisition.
Parting thoughts
With over 14% high distribution yield at its current market pricing, I am wondering how MUST is going to do any yield accretive M&A deals. It maybe a good idea to sell off some of its office buildings and diversify into other asset classes in order to unlock intrinsic value for unit-holders. Despite the prevailing headwinds from market conditions as well as the high gearing ratio (over 40%), I think that MUST maybe in a better state than the other 2 US office REITs (Keppel Pacific Oak & Prime REIT) by virtue that their management team, led by Mr Tripp Gantt, have already kicked off an introspection process as alluded to point 3 above to rejuvenate their business and to re-position it for future growth.
Please also see latest update announced by MUST on its strategic review on 25th November 2022:
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