Manulife US REIT may keep trophy asset Phipps in refinancing package, selling non-core assets instead .
Manulife US REIT’s (MUST) operational metrics have improved in its 3QFY2023, the three months to September. Rental reversions in the third quarter rose by 24.2% y-o-y. Leasing in MUST's sub-markets appear to be on a more stable footing in terms of tenant demand; lease terms are beginning to tick up again and tenants are comfortable with signing longer term leases. At the same time, tenant incentives (TI) continue to moderate.
“It’s still a tenants’ market but terms are getting closer together and concessions are beginning to moderate,” Tripp Gannt, CEO of MUST’s manager says. “We're beginning to find some firmer footing on some of the fundamentals that underline the leasing market. I wish I could say the same thing about the transaction market. The US transaction market continues to be very slow, and essentially frozen,” he acknowledges.
MUST needs the transaction market to pick up again so that it can divest some of its non-core assets to lower debt levels. The REIT’s aggregate leverage is at 56% based on rules as set out in the Code on Collective Investment Schemes (CIS Code) issued by the Monetary Authority of Singapore. Based on its bank covenants, all MUST’s loans are current and its aggregate leverage is at 59.9%. The REIT needs a rescue package urgently.
According to Gantt, the sponsor package — where Manulife steps in — has evolved “to something that seems quite agreeable to almost everybody that's involved in these negotiations”.
While details were sketchy during a results’ call on Nov 3, Gantt says: “We’ve made a lot of progress. The sponsor support package is a really key component of this entire restructuring and we're actually quite pleased with the sponsor support package that we've ended up with.”
MUST’s manager has also drawn up a business plan, which is part of the refinancing effort, on properties it wants to keep and spend capex on, and those it plans to dispose of.
“Our Atlanta properties are at the top of our list, both Phipps and Peachtree. For Peachtree, obviously because we're doing AEI and we feel that the location of that property is really fantastic and justifies the investment. We always identified Phipps as being one of our highest-quality, strongest assets. When we were looking at the potential disposition of that to the sponsor, part of that was because it was because it was the most liquid asset. We wrestled with selling our highest-quality asset,” Gantt admits.
Back in August, MUST’s manager had announced plans to divest of Phipps to its sponsor as part of its refinancing package. At the time, Marc Feliciano, who is currently chairman of MUST’s manager and the sponsor’s representative, had articulated that MUST needs a refinancing plan to get it beyond 2024 and till 2025, which involved a credit facility from Manulife coupled with the sale of Phipps, and a business plan.
Analysts believe that the refinancing package is likely to come with the sale of assets, among which could be those in Fairfax Virginia, where MUST owns Centerpointe I&II. Physical occupancy in Penn, a property in Washington DC, is very low. Downtown Los Angeles where MUST owns Figueroa is another challenging market.
“We've identified several properties previously in previous quarters where occupancies are and the properties may be in markets that are tertiary. The plan is to shed these non-core assets [because] we think they are not going to have that financial return, and really focus our resources on places where we can get that return in those higher quality, better location buildings,” Gantt says.
The Federal Reserve has decided to pause on its rate hike trajectory. Market watchers including JP Morgan Asset Management expect the pause to continue during the December FOMC meeting, and into 2024. Additionally, some economists reckon the Fed could cut rates in 2H2024.
That should be good news for MUST. Gantt believes that the signs of unfreezing in the US office market could start “when the Fed begins to signal that they're going to stop raising interest rates and that we're in a more stable environment”. At that point, the banks could start lending. “That'll bring the buyers back and unfreeze this market,” Gantt says.