Manulife US Reit on track to conclude loan talks by year-end; sponsor support package ‘compelling’ to lenders: CEO

THE manager of Manulife US Real Estate Investment Trust (Manulife US Reit) is on track to conclude by year-end its negotiations with banks, following the Reit’s breaching of the lenders’ unencumbered gearing ratio, said the manager’s chief executive officer Tripp Gantt.

A key component of this restructuring is the introduction of a sponsor support package, the contents of which are “compelling” to all parties at the table, he said as he gave a third-quarter business update on Friday (Nov 3).

He said he could not give away too much on the package for now as the talks with the lenders are “sensitive and confidential”, but pointed out that the execution of the package will depend on the lenders’ approval. “What I can tell you is that we have been in constant non-stop contact with the banks, with the lenders, and our sponsor... working on this negotiation, and we’re looking forward to having something to share with you here in the coming weeks.”

He added that the sponsor’s package, which is intended to address the Reit’s long-term liquidity needs and to give it more financial flexibility, “has evolved to something that seems quite agreeable to almost everybody that’s involved in these negotiations”, and is something the manager is “quite pleased with”.

Manulife US Reit’s manager first entered into discussions with banks in July, after the Reit breached a financial covenant in some loan agreements. The covenant had set out a condition – that the ratio of consolidated total unencumbered debt to consolidated total unencumbered assets should be not more than 60 per cent. The breach caused all the Reit’s loans to be reclassified as current liabilities.

The manager reported on Friday that its unencumbered gearing ratio for Q3 now stands at 59.9 per cent, but negotiations with the lenders to waive the breach would have to continue, as lowering the unencumbered gearing ratio does not rectify a breach of the financial covenant. It also highlighted that distribution payment is also part of the ongoing negotiations with the Reit’s lenders.

Asked if an extraordinary general meeting (EGM) to approve the terms of the restructuring would take place by the end of the year, the manager’s deputy chief executive Caroline Fong said this would depend on how the talks with the lenders turn out, and whether the documents can be ready in time.

That said, she expressed hope that all proceedings, including the EGM, will be finalised by early in the first quarter of next year, based on the current target for the negotiations with the lenders to conclude by the end of this year. Pointing out that a circular would have to go out before the EGM is held, she quipped: “You never know, you may have a Christmas present, and we hope we don’t have to have an analyst and media briefing on Christmas Day.”

On the potential impact of the loan restructuring on the Reit’s credit spread, the manager’s chief financial officer Robert Wong said: “At the moment, we can’t share any colour as to what the pricing is going to be, but it’s not going to be moneylender rates. It’s measured. I think it’s (looking to be) a win-win for all – lenders, unitholders and investors.”

Gantt revealed that the manager is beginning to look at selling its non-core assets – those properties that do not come with a “strong, compelling, future-return potential” – to reduce the Reit’s indebtedness and fund capital expenses (capex). A disposition mandate would give the Reit the flexibility to be competitive when the US office market opens up and turns conducive for a sale, he said.

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Manulife US Reit posted an occupancy rate of 84.7 per cent as at the end of September, 3.4 percentage points lower than the 88.1 per cent for the same period last year.

As at Sep 30, the interest-rate coverage of its debt profile stood at 2.4 times, down from 3.4 times in the corresponding period last year. With its interest-rate coverage ratio below 2.5 times, the Reit is not allowed to increase its leverage to beyond the prevailing 45 per cent limit, instead of a 50 per cent limit.

Meanwhile, its aggregated leverage ratio, or gearing, declined slightly on the quarter to 56 per cent, but up 13.5 percentage points from 42.5 per cent by the end of last September.

The manager noted that based on the Monetary Authority of Singapore’s Code on Collective Investment Schemes, the aggregate leverage limit is not considered to be breached if it was due to “circumstances beyond the control of the manager”.

The manager should not incur any additional borrowings or enter into further deferred payment, if exceeding the gearing limit was led by property fund depreciation, or any redemption units or payments made from the property fund.

The Reit’s weighted average term of maturity stood at 2.3 years, with 69.2 per cent of loans on fixed rates.

Its portfolio weighted average lease expiry stood at 5.1 years, with its top 10 tenants mainly company headquarters or government agencies.

Regarding a potential rights issue to inject more capital into the troubled Reit, the manager noted that the talks with its lenders must first be finalised for any equity fundraising to be considered.

A year-end portfolio valuation will be done as required, which might register a continued decline in office valuations in the US, it added.

“Under the International Financial Reporting Standards, we have to carefully assess the appropriateness of the fair values of investment properties reported in our balance sheet.”

As at Jun 30, the cash balance stood at US$133 million, which the manager expects will allow the Reit to “continue operating (its) portfolio prudently”.

“We have set aside a budget for essential capex for 2023, and have reviewed our 2024 budget to determine what essential capex we can undertake.”

Units of Manulife US Reit closed 9.4 per cent, or US$0.005 higher, at US$0.058 on Friday.