Manulife US Reit abandons H1 distribution; sponsor says ‘remains committed’ despite earnings call no-show

THE manager of Manulife US Real Estate Investment Trust (Manulife US Reit) declared no distribution for the first half ended Jun 30, as the Reit has breached banks’ unencumbered gearing ratio, causing all its loans to be reclassified as current liabilities. 

The financial covenant in Manulife US Reit’s loan agreements provides that the ratio of consolidated total unencumbered debt to consolidated total unencumbered assets shall be not more than 60 per cent.

After reporting a higher ratio of 60.2 per cent on Jul 18, the Reit has since lowered its bank unencumbered gearing ratio to 59.7 per cent, following a good faith payment in August.

However, to rectify the breach of financial covenant, the Reit needs to obtain an expressed waiver from the lender banks. These negotiations are ongoing.

“Together with our sponsor, we are negotiating with our lenders to address the breach and embark on a plan to bolster the Reit’s liquidity needs, be it the potential disposition of Phipps Tower or a potential alternative method,” said Tripp Gantt, chief executive officer of the manager of Manulife US Reit.  

At a briefing accompanying the results announcement on Monday (Aug 14), the Reit manager said that whether Manulife US Reit is able to resume its distribution payment in the second half hinges on the outcome of these discussions.

“The second half is predicated on the successful negotiation with the lenders, as well as making sure that we have the liquidity to address all our current obligations going forward,” said Robert Wong, chief financial officer of the Reit manager.

In a separate interview with The Business Times on Monday, sponsor representative Marc Feliciano, global head of real estate for private markets at Manulife Investment Management, stressed that the sponsor “remains committed” to the Reit.

“In the near term, we’re trying to get to a resolution with the lenders/creditors and buy as much time through some sort of agreement with the lenders,” Feliciano said. “(This is to) allow the markets to stabilise, to have greater liquidity to sell the worst assets, and quite frankly, reposition the portfolio. (This will) then, hopefully, allow property values to appreciate over the next couple of years.”

The sponsor representative was slated to attend the earnings call for analysts and media, but pulled out at the last minute for “a very deliberate reason”.

According to Feliciano, responses had been thoroughly prepared together with the manager to address potential sponsor-related questions if asked at the briefing. As such, he said, the sponsor’s attendance “would be a distraction”. “We were unaware of the listing of the sponsor’s attendance in the invitation,” he added.

“I don’t think the sponsor commitment or support has deviated,” Feliciano said. “I get the sense from listening to (this morning’s earnings) call, and what I’ve heard since I’ve been here in Singapore, is that the sponsor is not committed to the Singapore Reit. Nothing is further from the truth.”

H1 results continue to decline.

For H1 2023, the Reit manager on Monday reported a 17.4 per cent decline in distributable income to US$37.9 million, from US$46.0 million in the corresponding year-ago period.

Net property income for the same period dropped 3.9 per cent to US$55.4 million from US$57.6 million in H1 2022.

Revenue dropped marginally by 0.8 per cent, to US$99.6 million from US$100.4 million in the same period a year ago.

The loss of net income was largely attributed to the “lower rental and recoveries income from higher vacancies along with the sale of Tanasbourne in April 2023, higher property operating expenses such as repair and maintenance, property taxes and utilities as well as higher finance expenses”.

The Reit’s portfolio occupancy declined slightly to 85.1 per cent as at Jun 30, 2023, from 88 per cent at the end of 2022, largely due to non-renewals at Diablo and Capitol. Finance expenses, on the other hand, increased to US$21.7 million from US$15.3 million in H1 2022.

The loss in income “was partially offset by higher lease termination fee income and higher parking income,” added the manager.

As at Jun 30, 2023, Manulife US Reit’s aggregate leverage ratio stood at 56.7 per cent.

The high gearing ratio was said to be a result of a decline in portfolio valuation, which is beyond the manager’s control. The manager emphasised that according to the Monetary Authority of Singapore (MAS) rules, it does not constitute a breach of MAS’ gearing limit.

Units of Manulife US Reit closed down 4.2 per cent, or US$0.004, at US$0.092 on Monday.