Manulife US Reit to retain distributable income for the first time; H2 DPU drops 10.3% pre-retention

THE manager of Manulife US Real Estate Investment Trust (Manulife US Reit) announced on Thursday (Feb 9) that it is retaining US$3.8 million, or close to 9 per cent, of distributable income for the second half ended Dec 31, 2022, for “general corporate and working capital purposes”.

This is the first time that Manulife US Reit is not paying out 100 per cent of its distributable income since its listing in May 2016.

The real estate investment trust (Reit) manager said in a statement that this was part of its efforts to “improve its financial flexibility”.

Manulife US Reit announced a distribution per unit (DPU) of US$0.0236 for H2, down 10.3 per cent from US$0.0263 a year ago.

Distributable income fell 1.7 per cent to US$41.9 million from US$42.6 million in the year-ago period. This was largely due to lower rental income from existing properties arising from higher vacancies, higher property expenses, absence of net reversal of provision for expected credit loss and rising interest rates.

After the retention, DPU to be paid out to unitholders for the half-year period fell to US$0.0214, down 18.6 per cent on-year.

Manulife US Reit is paying out 90.7 per cent of its distributable income for the period – in accordance with its policy to distribute at least 90 per cent of its annual distributable income. The resultant tax-exempt income distribution of US$0.0214 will be paid out on Mar 30, after books closure on Feb 17.

The retention of distributable income comes amid an ongoing strategic review, as the Reit manager explores fundraising options including asset divestments, a distribution reinvestment plan and equity injection.

The Reit manager added that it is currently in negotiations with the sponsor for a potential disposal.

“We’re more engaged with our sponsor right now than we ever have been. They’re really in the trenches with us at the moment,” said Tripp Gantt, chief executive officer of the Reit manager, at a briefing accompanying its results announcement.

The Reit manager noted that it has been reaching out to different parties that can provide a pipeline of assets, asset management expertise, or the capital needed.

“Our ultimate objective is to find a partner who will help us achieve the strategic things that we’ve been talking about for a while now – pivot into higher growth markets, higher growth type of tenants and asset classes potentially,” Gantt said.

“We’re pretty confident that we have a strategy that will work going forward; it’s just a matter of finding partners who can help us execute it,” he added.

For the half-year period, Manulife US Reit’s gross revenue was up 8.3 per cent to US$102.1 million, from US$94.3 million a year ago. Net property income (NPI) grew 3.9 per cent to US$55.5 million for the half year, from US$53.5 million.

The topline improvement was largely due to contributions from Tanasbourne, Park Place and Diablo, which were acquired in December 2021, higher car park income and lower rent abatements provided to tenants affected by Covid-19.

For the full year ended Dec 31, 2022, DPU was 6.8 per cent lower at US$0.0497 from US$0.0533 the year before, and 10.9 per cent lower at US$0.0475 after factoring in the retention in H2.

Distributable income grew 2.7 per cent to US$87.9 million in FY2022 from US$85.6 million in FY2021. Gross revenue was 9.4 per cent higher at US$202.6 million from US$185.1 million, while NPI rose 3.3 per cent to US$113.2 million from US$109.5 million for the full year.

The manager noted that despite challenges in the Reit’s submarkets, portfolio occupancy remained stable at 88 per cent as at end-December, which was above the US Class A average of 83.3 per cent.

Caroline Fong, deputy chief executive officer of the Reit manager, said: “What’s interesting – even this month and last month – is that some of the tenants that have downsized are coming back to us and saying ‘maybe we need more space’.”

She added that some tenants may have been “a little bit too enthusiastic” with their downsizing. “Physical occupancy should only get better, if you ask us.”

Gantt said: “A lot of folks are beginning to move away from physical occupancy as a direct gauge of what future demand is going to be.”

The way Gantt describes it, the way that office space is being utilised is changing, with tenants needing more collaboration and meeting spaces, for example.

“An office space might have had 100 people in it, in 10,000 square feet. Going forward, they may only have 50 or 60 people in that office, but they’re going to keep that same amount of space because the amount of space they need per employee may increase,” he said.

The weighted average lease expiry by net lettable area (NLA) also remained steady at 4.7 years, with only 10.8 per cent of its leases by NLA expiring this year.

In the fourth quarter ended Dec 31, 2022, the US-focused office property landlord executed leases of about 123,000 square feet with more than eight years left to their expiry. Of the leases signed, two-thirds were new leases, while 32.3 per cent were renewals.

The trust’s manager said that it continues to see “strong demand for new and repositioned offices in attractive locations”. It also expects the operating environment to improve for Reits, as the Federal Reserve’s tapering of interest rate hikes provides the market with more certainty in 2023.

As at Dec 31, the Reit’s gearing stood at 48.8 per cent. Meanwhile, its weighted average debt maturity stood at 2.8 years and weighted average interest rate was at 3.74 per cent.

Units of Manulife US Reit fell 9.1 per cent or US$0.03 to close at US$0.30 on Thursday.