THE valuation of the real estate portfolio of Manulife US Real Estate Investment Trust (MUST) fell by 8 per cent or US$123.1 million to US$1.4 billion as at end-December 2023. It was US$1.5 billion as at the end of the prior half-year period.

On Friday (Jan 5), its manager said that it expects the Reit to report a loss for FY2023 due to fair-value losses arising from the valuation decline. This is expected to result in the Reit’s net asset value declining by about US$0.07 per unit.

The manager said: “Taking into account the property rental income, Manulife US Reit is expected to be able to meet its interest payments and expenses as they fall due since fair-value losses are non-cash items in profit or loss.”

The fall in valuations was largely attributed to higher discount rates and terminal capitalisation rates for certain properties, along with the continued weakening of occupancy performance across the US office market due to a slowdown in demand and leasing activity.

Higher discount and terminal capitalisation rates reflected “risks posed by the volatile macroeconomic environment as well as idiosyncratic risks at the property level”, such as higher vacancy or weak sub-market fundamentals, said the manager.

On the other hand, it added that the demand and leasing activity slowdown led to higher vacancy levels and higher concession package assumptions needed to attract new or retain tenants. This in turn gave rise to higher leasing costs.

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The four properties with the largest-percentage valuation declines were Figueroa, Plaza, Penn and Diablo, which collectively comprise 54.2 per cent of the overall portfolio valuation decline. Figueroa is in Los Angeles, California; Plaza is in Secaucus, New Jersey; Penn is in Washington, DC; and Diablo, in Tempe, Arizona.

MUST’s manager said that US office valuations remain under pressure and may fall further in 2024. “Private market performance typically lags public markets, and the prevailing market sentiment is that these declines may continue through 2024, and perhaps beyond.”

After accounting for the repayment of loans, fair-value changes in investment properties and certain projections in the value of other total assets as at end-2023, the Reit’s expected aggregate leverage stood at 58 per cent.

The manager said that the aggregate leverage limit was, however, not considered to be breached, as the aggregate leverage of over 50 per cent resulted from circumstances beyond the manager’s control.

It estimated the Reit’s aggregate leverage to come in at 57 per cent, and its unencumbered gearing ratio to stand at 60:100. This came after factoring in a US$50 million debt repayment by Mar 31, 2024, which was part of the Reit’s ongoing recapitalisation plan.

In July 2023, MUST posted a 14.6 per cent fall in portfolio valuation from end-December 2022 levels. The Reit’s aggregate leverage ratio stood at 56.7 per cent as at end-June 2023.

Units of MUST closed US$0.002 or 2.5 per cent lower at US$0.078 on Thursday.