Potential sale of Manulife US Reit’s manager to Mirae calls into question steadfastness of its sponsor

INVESTORS in Manulife US Real Estate Investment Trust (Manulife US Reit) might be feeling the jitters and wondering where the trust is headed. This is understandable.

The Reit manager on Dec 30, 2022 – the last trading day of the year – dragged the media and market analysts away from year-end festivities to deliver some sombre news.

At a press conference, called at short notice, the manager revealed that the Reit’s aggregate leverage had risen to about 49 per cent – just shy of the regulatory limit for Singapore-listed real estate investment trusts (S-Reits) – after a 10.9 per cent decline in its portfolio valuation.

At its last earnings call on Feb 9, the manager sought to reassure the media and analysts that it continued to enjoy strong sponsor support.

“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 of the Reit manager.

It comes as a surprise, therefore, that the sponsor might be on its way out.

Manulife US Reit has confirmed media reports that its Reit manager – owned by sponsor Manulife – could be sold to Korean asset manager Mirae Asset Global Investments. Mirae may also subscribe to new units of the Reit.

Excitement over the potential Mirae deal saw Manulife US Reit’s unit price rise as much as 3.8 per cent before closing at US$0.27 on Mar 15. But units of the Reit have tumbled 20.4 per cent since then. Manulife US Reit closed at US$0.215 on Monday (Mar 27).

One possible reason investors are streaming out the door is that a change of sponsor is not what the Reit’s unitholders had been hoping for.

Recall that the manager of Manulife US Reit had said last year it would undertake a strategic review to deliver value to its unitholders. Investors might have expected a sale of some assets and a distribution of the sale proceeds, or maybe even a winding up of the Reit – which has long been trading below its book value.

But a new sponsor might have its own ideas for what it wants to do with the Reit – including injecting more assets into it.

Meanwhile, as activist investor Quarz Capital has pointed out in an open letter to the management and board of Manulife US Reit, the sponsor could walk away with a “golden parachute” despite the Reit’s “catastrophic performance”.

Since its listing in 2016, Manulife US Reit has generated total returns – with distributions reinvested – of negative 53 per cent. While unitholders have done poorly, its manager has continued to take home a fee and is potentially worth a lot of money.

To be fair, the sponsor of Manulife US Reit also owns a stake in the Reit. But its interests have been better protected because it also owns the manager.

Quarz does not have a stake in Manulife US Reit, but it does make a good point. “If this is allowed, it will set a precedent for other Reit managers: that they can freely lever up the Reit for acquisitions to increase their acquisitions and portfolio management fees,” Quarz said.

Another objection Quarz has made is over the possibility that a new issue of units to Mirae at a highly discounted price would dilute unitholders.

In response to queries from The Business Times, a spokesperson from Manulife US Reit said it was “not feasible” to comment on Quarz’s letter as the proposal is non-binding and the manager is still in discussions with Mirae.

“The proposal from Mirae does not include any offer to acquire any existing units in Manulife US Reit,” the spokesperson added.

Should the Mirae transaction involve any placement of new units in Manulife US Reit, the manager will issue a circular to seek the approval of unitholders if required under Singapore Exchange listing rules.

This potential deal is a reminder of the governance minefields that unitholders tread with externally managed Reits, and makes a good case for internally managed Reits instead. The latter are increasingly seen as the gold standard for governance.

The manager of Manulife US Reit just last week announced it has been awarded an “AAA” rating – the highest possible – for environmental, social and governance (ESG) standards by MSCI.

But a top-notch rating won’t be much good if investors don’t believe that the interests of the external manager and the sponsor are aligned with their own.