Manulife US Reit to get slight lift in reverting to previous group structure

Singapore

MANULIFE US Reit is reverting to a group structure largely similar to the one it adopted at the time of its listing in 2016 after ascertaining it will suffer no meaningful adverse impact stemming from changes in the US tax regulations.

The impact of this reversion would be negligible for this fiscal year due to the compliance and restructuring costs already incurred.

But savings from next year onwards could add about 0.7 per cent to its distributable income, the Reit manager said on Tuesday.

It noted that the final regulations under Section 267A of the US Internal Revenue Code, issued last week, had no meaningful differences from the earlier proposed 267A regulations.

As a result, the manager believes that the final 267A regulations would allow Manulife US Reit to revert to its previous structure, and that means enabling it to do away with the Barbados entities which were set up in January 2018 to ameliorate any adverse impact arising from the final regulations.

In a conference call with analysts, media and investors on Tuesday, Manulife US Real Estate Management chief financial officer Robert Wong said that the manager had already been preparing to unwind the structure and expects this to be done by the end of this month.

"From that point on, there should be no tax leakages after the restructuring," he added.

"Removing the structure will result in fund flows and tax efficiency. The Barbados structure has proven to be quite cumbersome from an administrative and operational perspective, so this will also save us some ongoing costs by removing this layer of structure."

Units of the Reit added 1.5 US cents or 2.1 per cent to close at US$0.73 on Tuesday's stock market.

Manulife US Reit had in January 2018 announced certain changes to its holding structure in order to address changes to the US Internal Revenue Code which kicked in from January 2018.

The US government did this in response to international concerns regarding hybrid arrangements that were used to achieve double non-taxation that exploit differences in tax treatments in two or more countries.

Specifically, Manulife US Reit set up an interim Barbados holding company structure for its intercompany financing of Hancock S-Reit Parent Corp to address the potential impact of the newly-enacted Section 267A of the IRC on the deductibility of certain interest expense for taxable years beginning after Dec 31, 2017.

In December 2018, the United States Department of the Treasury released proposed regulations under Section 267A. Separately, around that time, the government of Barbados also announced that it will converge its local and international tax rates. It proposed that from Jan 1, 2019, domestic companies will pay the same tax rates as international companies, on a sliding scale of 5.5 per cent, reducing to one per cent as taxable income increases.

The current tax paid or payable by Manulife US Reit in US and Barbados is about 1.5 per cent of distributable income before income tax for the financial period from Jan 1, 2019 to Dec 31, 2019, or about S$1.3 million, Mr Wong said. (see amendment note)

The reason why there is no upside to distributable income this fiscal year is because it had continued to pay for the Barbados tax structure until the end of April this year, plus there are also ongoing compliance, audit and tax restructuring costs that will negate most of the savings for this year.

David Kaplan, partner at Sullivan & Worcester LLP, which represents the Reit, said: "We expect that the IPO structure is as robust as we thought it was when we launched the IPO. Again, nothing is permanent in life, but we do expect once we have returned to the original IPO structure, that there won't be any material changes in the foreseeable future."

RHB analyst Vijay Natarajan noted that the finalisation of the tax structure has been pending since 2019, and with the expected tax saving of 0.7 per cent, he would likewise expect a similar uplift to his distribution per unit (DPU) forecasts from 2021 onwards.

CGS-CIMB analyst Lock Mun Yee added that switching out of the Barbados tax structure and the resulting tax savings is likely to have a slight positive effect on the brokerage's earnings estimates, but more importantly, the finalised regulations can remove any overhang from this issue on the Reit's unit price performance.

In the same vein, the manager for Prime US Reit on Tuesday said it will be winding up its two dormant Barbados-incorporated entities that had been set up for US tax purposes.

Amendment note: An earlier version of this story had mentioned the S$1.3 million tax paid by the Reit in US and Barbados citing the wrong time period. This has been corrected.