Based on what took place at a presentation by Manulife US REIT’s (MUST) manager and an audience at CGS-CIMB on October 10, it appears increasingly that the manager and sponsor of MUST are speaking with one voice.
“Stay alive till 25” is what Tripp Gantt, CEO of MUST’s manager is reported to have said during the presentation, when he was asked what his thoughts are on the US office market. When will it bottom? Attendees took this to mean that MUST plans to stay alive till 25. On the other hand, he didn’t appear to provide a timetable for an EGM which is required for a sale of Phipps to the sponsor, or details on any other plans.
The 25 Gantt refers to stands for 2025. Various US office benchmarks like the NCREIF Office subindex reported the office market showed values declining 18.4% y-o-y in 2Q2023. The NCREIT Office subindex is appraisal-based and does not take into account transactions. According to MSCI, offices comprised more than 80% of distress assets (US$6.7 billion) during 2Q2023.
During the global financial crisis, the NCREIF Office subindex’s peak was in 2Q2008 and its bottom in 2Q2010 with a 31% decline for office, compared to –18.4% currently.
Marc Feliciano, Manulife Investment Management’s global head of real estate, private markets and a non-executive director of MUST’s manager, says the office cycle decline started in 1Q2022. Assuming instead of a two-year decline, the decline could persist for three years, and the trough could be sometime in 2025.
Feliciano had indicated, during an interview in August, that the sponsor is willing to move forward with a purchase of Phipps in conjunction with an agreement with lenders on a plan that deals with maturities in 2024 and 2025 and a longer-term agreement regarding potential breaches due to property valuations.
On Oct 10, in presentation slides, MUST’s manager states that negotiations are underway alongside the sponsor on the potential disposition of Phipps or alternative method; execution of the sponsor’s support options will depend on reaching an understanding with lenders; and the aim is to generate proceeds to repay upcoming loan maturities, fund capex and leasing costs.
Feliciano had articulated that the sponsor’s aim is to generate a financing plan to maximise the runway for as long as possible so MUST is able to clear debt maturities through to the first half of 2025. In his view, the total cost is likely to be US$330 million to US$350 million for the sponsor (inclusive of Phipps). This would take care of the US$39.7 million revolving credit facilities, US$143 million expiries in 2024, and expiries of between US$150 million and US$170 million due in the first half of 2025.
“The best thing the REIT manager can do in this time is build an operational plan and get the occupancy up,” an analyst says. And that is exactly what Feliciano had said in August: “The management team needs to put out a capital strategy, cashflow strategy and portfolio strategy. It means selectively picking which assets to spend your capital based on cash flow strategy, where you should reinvest through capex to maximise asset value, and which assets you feel you shouldn’t spend that capital on, and sell those assets.”
According to attendees at the presentation, they were none the wiser as to the manager’s plans. “We’ve no idea whether a building will be sold, or when the manager will resume distributions; all we know is that MUST needs to stay alive till 25,” one of the attendees says.
