Wednesday 29 November 2023

Devastating Recapitalisation Exercise for Manulife US REIT- Sponsor Raided Shareholders Via Loan-Shark Loan.

The much anticipated rescue plan was announced by the Manager of Manulife US REIT ("MUST") on 29 November 2023. First and foremost, let me address the elephant in the room in the current MUST fiasco. Personally, I think that all unit-holders have not much of a choice but will need to vote for this at the upcoming EGM to approve the loan-shark loan from the sponsor. There is currently no other viable alternatives-MUST had previously explored and exhausted various alternatives to address the breach of financial covenant and the sharp decline in the real estate valuation but to no avail. Failure to do so will mean an immediate liquidation or firesales of all office assets at this worst possible juncture which is the trough bottom of the US commercial office market.   

1. Loan-Shark Loan (US$137Mil)- Interest of 7.25% per annum and also additional 21.16% extra of the capital return at year end- total  64.66% financing cost over 6 years!
For a sponsor loan of US$137Mil from The Manufacturers Life Insurance Company, all unit-holders need to pay an overall whopping financing cost of S$89 Mil at the end of 6 years. This is actually an interest rate of 10.7% per annum- this is an additional financing expenses of US$14.7Mil per annum.

2. Halting of all distributions until 2025.
Half-yearly distributions to Unitholders are to be halted till 31 December 2025. The distributions may resume during such period if the "Early Reinstatement Conditions" are achieved. For 2024 to 2025, note that because distributions are halted, the current tax savings vehicle built into place has collapsed. There will be additional corporate tax imposed on MUST.

"Early Reinstatement Conditions" definition (Pt 15 of Appendix A announcement):
(i) Consolidated Total Liabilities to Consolidated Deposited Properties is no more than 45%; or

(ii) Consolidated Total Liabilities to Consolidated Deposited Properties is more than 45% but not more than 50%, and Interest Coverage Ratio is more than 2.5 times,

3. Additional corporate withholding tax
As alluded to point 2, tax as high as 43% maybe imposed on the retained distributions in particularly for failure of unit-holders to supply the United States withholding forms and certificates. I will be using a 30% withholding rate as the average for quantification of the impact. Considering the yearly distribution of US$76Mil using an annualization of 1H 2023 results. This is an additional needless cash burnt up of US$22.8Mil per annum.

Parting thoughts
This is really a nightmarish outcome. A breach of banking covenant due to declining property valuation led to additional financing and tax expenses of US$37.5Mil per annum (as aforesaid mentioned in point 1 and point 3) being imposed on MUST which is equivalent to a mind boggling 50% of the yearly distributions being wasted. 


  1. Hi Blade Knight, I have written my thoughts. Understand you are a shareholder. Could you help forward my enquiry to MUST since you are a small shareholder. Link is below

    1. Hi Choon Yuan, thanks for dropping by and I have read your blog post. Let me add on my thoughts to 2 of your main queries:

      1. This is a breach of banking covenant and a high risk of bank loans default.
      If I am the banker, I will have to impose certain conditions to freeze the payout immediately in order to conserve as much capital as possible and to ensure unit-holders have as much skin as possible in this fiasco.

      If I am the management of MUST, in such uncertain economic conditions so near the year end, I will also have to freeze the payout temporarily until the financial position stabilized and also strengthen.

      I reckon it is a mixture of these 2 conditions by the above mentioned parties that give rise to the halt in distribution temporary for 2 years;

      2. The rights issue you proposed and whereby anything short to be funded by the Sponsor’s loan is brilliant. However, the devil is in the details. This just would not work out. Reason being that if only the majority unit-holders participate while some or most of the other unit-holders refused to take part, this means that the unit-holdings for these individual unit-holders would exceed 9.8% which would mean a permanent withholding tax of 30% imposed on the distribution. Such is the nature of the 9.8% US Tax planning vehicle structure in place.

      To add on to point 2, your proposal may have to involve a 3rd parties stepping in to mop out excess unsubscribed units given that MUST financial position currently is crumbling- this is the only way to avoid breaching the 9.8% individual stake holding curse. In better times, maybe a group of bankers can step in to underwrite this rights issuance exercise but definitely not at this juncture.

    2. Depends on the mechanism, if 80% of rights are subscribed, then REIT manager should only subscribe to 80% of its allocation. Then the 20% shortfall seek Sponsor Manulife Loan. This becomes a very fair mechanism

    3. Maybe you would like to illustrate with a mathematical example with 3 shareholders in a REIT undergoing a rights issue with no underwriting to reverse engineer the rights to be taken up by those shareholders with a huge stake?

      Also what if in real life there are other major shareholders besides sponsor itself with 9.8%? So in the rights option form, the manager will need to also indicate a tick box on special column on to take up such that it will not exceed their 9.8% and willingness to take up to the amount to maintain their 9.8%?

      The rights exercise become kinda of very messy. Technically and legally, the rights issue became non uniform and I am not sure whether this is ok.

  2. Hi Blade, haven't been a unitholder of Manulife but have been following the situation closely regardless. My personal thoughts are that Manulife as the sponsor is simply trying to extract all possible value from the REIT at this point. 10% Effective Interest Rate is quite high. I haven't done the calculations but at approximately x0.2 price to book ratio, I would prefer to take my chances with liquidation. Distributions are halted for basically 2+ years at MINIMUM with high possibility of further equity rights issue after tranche 2 is divested. Best to use the money else where instead of being locked up for so long. Just my two cents

    1. Hi Passive Loss, thanks for sharing your thoughts and dropping by.

      Personally, i think that there is a high probability that in a liquidation and fire sales, one may end up with nothing return to unit-holders. Weird items like defaulter interest rates, dragging on of proceedings which lead to higher legal fees may occur. The current solution seems to be a safer bet to restructure the capital for the future and also to await market recovery in office commercial.

      But I do fully agree with your train of thoughts that maybe redeployment of funds for investment elsewhere is a better option under liquidation. There are some folks who have voiced out that they will rather opt for liqudiation.

  3. Hi Blade, thanks for all of the MUST articles you've put out over the years. I'm following all of this from the US and wanted to clarify some points and ask a couple of questions about your article.

    1. For the $14.7mm additional interest expense you mention, doesn't a lot of that get cancelled out by the senior loan balance reduction after $250mm is paid down?

    Ran some rough numbers and I'm getting a 5% increase on total interest expense (including the effectively accrued interest from Sponsor Loan exit fee). And in terms of cash position, they'd be paying less current interest overall. However, since NOI would be reduced by $6mm after Park Place is sold, Interest Coverage Ratio would still be 2.4x.

    2. In terms of tax consequences, my understanding of what MUST mentions in their letter is that the 43% tax only applies to 1.5% of capital. Do you think this is misleading? Can you tell me your reasoning for modeling 30% withholding tax?

    Although bad for investors, I think withholding of distributions is a very good thing for the ultimate longevity of MUST, as it will allow $40-50mm per year of additional cash that the S-REIT can use to fund leasing costs and capital expenditures that have been historically funded by taking on additional debt. Otherwise, they won't be able to lease and increase occupancy.

    Lastly, what is your opinion on the actual fair market value of these assets? The 3rd party appraisers who put out MUST's valuations are building-in a recovery scenario into their DCF calculations, i.e. assuming all many of the properties get renovated and stabilized and keeping low terminal discount / cap rates over the next 10 years.

    Here in the US, there are almost no office transactions happening, and for un-stabilized buildings, buyers are basing their offers on existing debt balance, minus some sort of discount.

    I ask because there is a portfolio valuation at which liquidation does result in decent returns at today's share price. But if this restructuring doesn't end up happening for whatever reason, it looks like values can only fall ~30% before equity breaks even using rough justice numbers (and more like 40% if the restructuring is successful).

    I feel that values in a fire sale in the current market could be much lower than that...

    Thanks again,

    1. Hi Austin, thanks for dropping by. Trust all’s well at your side. With regard to your queries, my thoughts as below:

      1. On the Sponsor’s loan with super high interest rates, i am comparing it to the cost of debt by other comparable commercial REIT entities such Keppel Oak Pacific or Prime REIT. It just myself-lamenting at the deep hole that MUST have dug itself to end up with a defaulter interest rate (mgt spent more than 1 year without being able to resolve this crisis) and that the Sponsor is unwilling to provide a concessionary rate. I did not run a full forecast of the P&L-just not practical and really no point at the moment. The reason you had already mentioned yourself that MUST may not survive a liquidation if the rescue package is voted down.

      2. On the withholding tax rates. I am applying the general WHT of 30% as this is the rate for non residents. The 40% mentioned by MUST is due to non proper filing of documents by unit-holders required by Uncle Sam.

      3. On fair mkt value, since there are nearly no transactions as you mentioned, then it cannot be fairly determined. Valuation will have to be on DCF. But there are currently so many variables such as additional tenants pulling out of Tenancy Agreement for breach of contract by MUST that it again cannot be practically determined other than a subjective and theoretical exercise. Over the past year, many analysts of major brokerages and banks have made their assessment and all failed.

      I am aligned with you that a firesales could end up with even a 50% off and nothing left for unit-holders unless our dear Sponsor is willing to be the stalking horse and offer up to the amount stipulated in the valuation report pricing in the auction during liquidation.