SINGAPORE – The Covid-19 pandemic has sent the US office market into an unprecedented tailspin, and the downward spiral has been intensified by the rising interest rate environment. But this era is likely coming to an end as interest rates start pulling back and normalisation of work practices gathers steam.
Manulife US Reit’s chairman Marc Feliciano said if the company is recapitalised, it could be well-positioned to recover as the next two to three years “could be the best of times for the US office property market”, barring unforeseen circumstances.
“We need to execute (the recapitalisation plan),” he said. “This is just the beginning of the stabilisation. The next two years can be a period of recovery for the Reit (real estate investment trust), amid a general recovery in the US property market. There is light at the end of the tunnel, and we are committed to seeing this through.”
Speaking to unit holders and analysts during an hour-long webinar on Dec 6, Mr Feliciano and Manulife US Reit chief executive Tripp Gantt described the troubles Manulife US Reit currently faces as being the result of a “once-in-a-lifetime” change in how Americans use offices.
Indeed, with workers choosing to work from home, demand for office space has fallen, resulting in industry valuations diving more than 21 per cent. Meanwhile, tighter financial conditions have seen office transactions fall 69 per cent over the past two years. Many office landowners have seen a sharp fall in rental yields and valuations.
It all hit home for Singapore-listed Manulife US Reit in July 2023, when the company’s portfolio valuations fell 14.6 per cent, causing the Reit to breach its existing financial covenants, and affecting its ability to pay out distributions.
Its proportion of unencumbered debt to unencumbered assets exceeded the 60 per cent threshold, and its aggregate leverage crossed the 50 per cent regulatory gearing limit.
This left the Reit in a tough spot, with few good options remaining.
But the recapitalisation plan announced recently requires unit holders to approve three resolutions: the proposed divestment of the Reit-owned Park Place in Arizona for US$98.7 million (S$132.2 million); a six-year loan from its sponsor for US$137 million, at an effective interest rate of about 10 per cent; and utilisation of some of the US$50 million in the Reit’s cash holdings.
In all, the three measures are collectively envisaged to help the company pay down some US$285 million in outstanding debt on a pari passu – on equal footing – basis, reducing lenders’ exposure. Together with other divestments, the plan is to bring leverage down from 56.5 per cent to 49.4 per cent as debt falls from US$1.02 billion to US$654.5 million.
Manulife US Reit has called for an extraordinary general meeting for unit holders to vote on Dec 14; proxies must be lodged by Dec 11.
If unit holders do not approve any one of the resolutions, Manulife US Reit’s existing facilities would remain in breach and lenders have a right to accelerate the payment of the US$1.02 billion of loans immediately to its 12 lenders. Liquidation of Manulife US Reit’s portfolio at distressed prices could follow.
“The recapitalisation is the only path forward,” Mr Gantt said, adding that it was a workable solution to save the company and put it on a path to recovery and growth.
He added that even after recapitalisation, the company would continue to actively manage its portfolio, selling low-yielding assets and recycling cash to buy higher-yielding properties. He also assured his audience that Manulife US Reit would not sell any property above a 10 per cent discount to independent valuation.