Manulife US REIT (MUST) BTOU has halted its distributions for the 1HFY2023 ended June 30 as the REIT had breached a financial covenant in some of its financing documents, which resulted in the REIT’s loans being reclassified as current liabilities.
The breach came after the REIT announced that its portfolio valuation fell by 14.6% to US$1.63 billion ($2.16 billion) as at June 30 on July 18.
The lack of DPUs was also due to the REIT being unable to confirm that it will be able to fulfill its liabilities as they fall due after making the distribution.
During the 1HFY2023, MUST also reported a net loss of US$247.6 million, down from earnings of US$62.8 million in the same period the year before.
Gross revenue for the six-month period fell by 0.8% y-o-y to US$99.6 million mainly due to the sale of Tanasbourne that was completed in April 2023. The lower gross revenue was also attributable to the lower rental and recoveries income as a result of higher portfolio vacancy rate and partially offset by higher lease termination fee and parking income.
Net property income (NPI) fell by 3.9% y-o-y to US$55.4 million mainly due to the lower gross revenue and higher property operating expenses.
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Distributable income fell by 17.4% y-o-y to US$37.9 million.
In its results statement, the REIT said that it is “working to generate proceeds to repay upcoming loan maturities, and fund capital expenditure (capex) and leasing costs”.
“Together with our sponsor, we are negotiating with our lenders to address the breach and embark on a plan to bolster MUST’s liquidity needs, be it the potential disposition of Phipps Tower or a potential alternative method,” says Tripp Gantt, CEO of MUST.
“We are tackling the problem systematically to raise funds to pay down debt and fund essential capex, including leasing costs such as tenant incentives. Concurrently, we are pursuing a disposition mandate, subject to unitholders' approval, to sell a certain amount of assets within set parameters to generate liquidity,” he adds. “All this is occurring against the backdrop of our ongoing strategic review, where we continue to engage with potential partners who are evaluating options such as asset sales, capital injection and strategic transactions around the REIT platform. We hope to share positive developments with the market soon.”
Following a good faith payment in August 2023, the REIT has lowered its bank unencumbered gearing ratio to 59.7%, from 60.2%, although the reduction of the ratio does not rectify the breach in its financial covenant.
“Once a breach has occurred, the lenders need to expressly waive the breach. These negotiations are ongoing,” says the REIT.
As at June 30, MUST’s aggregate leverage ratio stood at 56.7%, which is not considered a breach of the property funds appendix by the Monetary Authority of Singapore (MAS) as it had occurred due to a decline in portfolio valuation, which is beyond the manager’s control.
MUST’s interest coverage stood at 2.6 times as at June 30, down from 2.9 times as at March 31.
Rising interest rates pushed MUST’s weighted average interest cost slightly higher to 4.10%, from 3.98% three months ago, while the percentage of fixed rate loans has held steady at 80.2%.
The REIT’s net asset value per unit is 40 US cents as at the end of June 2023, mainly due to its fair value loss on investment properties.
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As at June 30, the REIT’s portfolio occupancy stood at 85.1% with a portfolio weighted average lease expiry (WALE) of 4.9 years. The REIT reported positive rent reversions of 3.7% as at the same period.
As at June 30, cash and cash equivalents stood at US$133.7 million.
Units in MUST closed at 9.6 US cents on Aug 11.
