Manulife US REIT High Gearing Ratio Crisis To Be Averted With Entry of New Sponsor- Korean Mirae Asset Global Investments.

First and foremost, I am vested in Manulife US REIT ("MUST") and I do have mixed feelings over the recent development. Basically, on 15th March 2023, MUST confirmed media reports leaking out earlier news of the potential entry of Mirae Asset Global Investments and a potential sales of stake in MUST Manager as well as a private placement in MUST itself. I was a bit disappointed as I thought that MUST would either sell off 1 or 2 office buildings or even dispose the entire portfolio of office assets- these would be the most value adding options on the table for current unitholders of MUST as it is currently trading at a 50% discount off its Net Asset Value ("NAV") per unit.

1. Why I do not like the entry of Mirae Asset Global Investments into MUST
It sure looks to me that the original sponsor, The Manufacturers Life Insurance Company (Manulife), is bailing out itself. It did not offer any plan to buy-over any office asset of MUST to avert the potential statutory leverage ratio breach. This seems to suggest that MUST management has great reservations about the future income generating abilities of commercial office assets given the hybrid working arrangements taking root in US. 

Another reason why I do not like the above recent development is that preference private placement for MUST is most likely on the table. MUST current market pricing has tumbled by more than 50% and more than half off its NAV per unit. For Mirae Asset Global Investments to inject additional capital into MUST, this will be definitely done at the prevailing market rate with another 5%-10% further discount I reckon which is extremely unfair to long standing loyal unit-holders. All unit-holders will be diluted by such a move.

2. Achilles' heel faced by Sponsors of most US REITs

I just realized that most US REITs faced one fundamental issue. The sponsors will not be keen on capital injection to save the REIT due to the withholding tax rule that non-US person should not hold more than 10% of the units in the REIT. If not, the US withholding tax rate of 30% will apply which will shave off a hefty part of the income distribution to the sponsor. MUST's sponsor, The Manufacturers Life Insurance Company (Manulife), seems to be worried about this tax issue. I believe that the new sponsor Mirae Asset Global Investments will also be facing this particular tax challenge.

Retail investors buying into US REITs will have to bear more risk premiums as there are restrictions being handcuffed to a sponsor.  

Parting thoughts

I can only say that beggars can't be choosers. A rescue plan on the table is better than nothing and letting MUST continue to wither away due to the albatross dangling around its neck is certainly more detrimental to existing unitholders. Hopefully, in a few more years, the office demand will go back up and a more friendly interest rate environment will lead to a better market price and also higher distributions to all MUST unitholders.

Last but not least, if Manulife is no longer a sponsor to MUST and held zero shares in the REIT Manager, then I will need to also revise my investment thesis and may cut down further stakes in MUST for re-deployment of capital into other investments- I do have issues with Mirae Asset Global Investments as I do not know them well. 

Please also see my previous post: "Manulife US REIT Spectacular Self Implosion- Risk of Firesales of Office Properties Or Dilutive Rights Issue".