Saturday, 27 May 2023

Manulife US REIT Divest Major Property To Bring Itself Back from Existential Crisis.

The best news for me this week is the unexpected announcement from Manulife US REIT ("MUST") that it has entered into a letter of intent with its Sponsor (The Manufacturers Life Insurance Company) in relation to the sales of its major property Phipps Tower that is worth US$210Mil (at its last valuation exercise as at 31 December 2022). Amidst the various twist and turn of the MUST saga that is more exciting than the TV drama series, I actually do not mind (i) the fact that MUST had previously mentioned that divestment of properties is almost impossible in light of increasing interest rate environment and the weak commercial office market, or (ii) the fact that the Sponsor did not step in with such strong support at the start of this crisis which led to the current calamity facing MUST- anyway these points are no longer relevant. 

I am actually more than happy that Manulife Life Insurance Company suddenly had a change of heart and decided to step up to its moral obligation as a good sponsor to avert the existential crisis of MUST and a massive dilution facing loyal unit-holders if the Mirae deal is the only financing option left on the table. 

1.Aggregate leverage expected to be down to 43% after sales- existential crisis temporary averted.
It was reported that Phipps Tower is below market rental rate by 20%-30% and that the major tenant, Carter, has renewed 209K sqft of space with 18% rental reversion from 2025 while giving up 69K sqft. MUST manager expect the untaken up space to be easily rented out due to healthy tenant interest for bite size space that are 10K to 20K sqft. Assuming a 10% downward adjustment of the current valuation, this would imply a haircut of <US$21Mil> off its previous financial year end valuation of US$210Mil for the disposal exercise. This would bring gearing down to a more manageable level of 43.1%

2. The Mirae deal "exclusivity period has lapsed"- so what does this enigmatic statement mean?
This part of the recent announcement seems to be rather cryptic but is actually a tactful way to state that the Mirae deal has collapsed. Also, with the announcement of fervent Sponsor support as aforesaid mentioned, MUST can now negotiate from a position of strength instead of accepting a super dilutive proposal from Mirae or other prospective partners.

Parting thoughts
With MUST trading at a mere 0.3 times of its book value, the current meaningful divestment of a significant property will hopefully stem the tide against the plummeting unit price and shore up investor's confidence. A subsequent rights issue on improved sentiment will be most appropriate in its next strategic growth path.

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