Quartz Capital Steps In To Protect Manulife US REIT From Value Destruction by Its Sponsor Manulife.

In a surprising twist of fate, Quartz Capital (investment manager of private funds) have stepped in to rally support against conflict of interest by the Manager of Manulife US REIT and its Sponsor, Manulife, which is trying to package their exit as the REIT Manager along with conducting a private placement exercise with new units at a fire-sales price to Mirae Asset Global Investments, at the expense of all current unit-holders. In a strongly worded letter to the management and board of Manulife US REIT on 20 March 2023, Quartz Capital expressed their shock and grave concerns over the above mentioned transaction at Manulife US REIT due to its potential poor corporate governance aspects and serious conflicts of interest concerns which can further destroy unitholders' value to the seemingly sole benefit of the sponsor. I will just list down and re-produce the main points by Quartz Capital here (please refer to last paragraph for the URL):

1. Any Preferred Placement to Mirae Should be Approved by Unitholders

A preferred placement to a single party is not only highly uncommon, but there is also almost no precedence in the last 10 years of the SGX-listed REIT market unless it has been voted on by unitholders.

Firstly, as the preferred placement to Mirae is part of the potential transaction to purchase the REIT manager, Mirae should be subjected to SGX Rulebook 812. Approval from independent unitholders must be sought before any placement should be given to Mirae. This is to ensure fair pricing and the size of the placement to protect the rights of independent unitholders. Without the approval, the REIT manager can potentially undertake the preferred placement at a highly discounted price to Mirae in exchange for a higher purchase price for the REIT manager to the sole benefit of the sponsor. This is as the value of the sponsor’s stake in the REIT manager is potentially sizably higher than the value of its unitholdings. As Manulife only has 9.8% unitholdings in the REIT, existing independent unitholders will bear most of the destruction in unitholder value from a dilutive placement to Mirae at a low price.

2. REIT Manager Should Take Responsibility for Current Leverage Problem

As mentioned in a Business Times article by Ben Paul, the current high leverage problem seems to have

been caused by the manager’s move to further acquire assets in 2021 despite the leverage level already breaching the 40% threshold in 2020. 

Since Manulife’s US REIT’s IPO, the REIT has purchased more than USD 1.4 billion of assets from the sponsor. Almost all the assets bought from the sponsor have fallen in value, with the valuation of the Figueroa asset falling by more than 25% from USD 285 million to USD 211 million, resulting in the REIT to lose close to a S$75million in a single transaction with the sponsor. Manulife US REIT has fallen by 70% since its IPO in 2016.

3. Sponsor Should Not Be Allowed to ‘Walk Away’ with a Potential ‘Golden Parachute’

It is therefore a travesty that after such a catastrophic performance, the sponsor is now allowed to ‘walk away’ by potentially selling the REIT manager and its stake to another party. 

In most developed REIT markets such as US and Australia, transactions in REIT managers in the last 10 years are permitted and conducted mainly due to internalization, mergers of REITs or M&A in the sponsors of the REIT manager. It is therefore bizarre if MUST’s sponsor is now allowed to ‘cash out’ of the REIT manager after potentially putting the REIT into severe distress. 

The potential problems faced by unitholders from the change of REIT ownership is that after paying a substantial premium for the manager, the easiest way for the new owner to recover its cost is by acquisitions financed by capital raising in order to increase its portfolio management and acquisitions fees. 

MUST’s sponsor, Manulife, publishes a yearly comprehensive ESG report detailing its strong commitment to corporate governance. However, its treatment of minority unitholders at MUST tells a different story of a sponsor who is potentially ‘bailing out’ and trying to circumvent the SGX rulebook to undertake a preferred placement and selling the REIT manager to a single party at a handsome profit. 

Quartz Capital therefore urge the REIT manager and its sponsor to take responsibility and help the REIT navigate out of the current situation.

4. Preferred Placement Should be Subjected to an Independent Unitholder Vote and Offered to All Unitholders

If a preferred placement needs to be done to reduce leverage, it should be sized and priced appropriately and offered to all existing unitholders to enable them to be able to participate and average down their price if they wish to. Mirae can offer to underwrite the placement subjected to a unitholder vote.

Parting Thoughts:

Quartz Capital has an excellent track record of shareholder activism. Most recently, they had managed to get a better outcome for unit-holders of Sabana REIT by fighting against the ESR merger proposition at a ridiculous pricing. I am glad that an institutional investor such as Quartz Capital has finally joined the fray to tip the balance against Manulife Group which is only trying to save its own skin at the expense of other current unit-holders. 

Existing unit-holders can subscribe to email updates on the following site (https://www.protectmanulifeusreit.com/) setup by Quartz Capital. The letter by Quartz Capital to Manulife US REIT can also be viewed on this site.

Note 1: I am vested in Manulife US REIT. I hope that the CEO and management of Manulife US REIT reject the Mirae deal lest they get into a lawsuit for breach of fiduciary duty, especially, since Quartz Capital has mentioned that Mirae can choose to underwrite the placement of right issue units if it is being offered to all unitholders. There is just no more reason to issue private placement to an external party at such a huge discount.

Note 2: In the absence of alternative solution such as divesting properties and selling back to the unwilling sponsor Manulife Group as buyer, equity rights issue to raise funds (albeit not ideal in such market) seems to be the only solution out of this mess.  

Latest updates on 12 April 2023: "Manulife US REIT Clarifies That Sponsor Will Retain Its Shareholding And Divestment Of Office Building to Sponsor."