It’s no secret Manulife US REIT is in some sort of danger.
Two weeks ago, it announced its gearing ratio would hit 49%, which is alarmingly close to MAS gearing limit.
Now, a high gearing ratio helps boost a REIT’s financial leverage – and also boost its returns.
But I find this also raises the risk of distress if gearing ratio gets too high.
The thing is, what caused this surprising spike in Manulife US REIT’s gearing, is its entire property portfolio value has fallen by 10.9% to US$1.9 billion.
Note: Gearing ratio = total debt dividend by total assets.
I mean, I don’t own shares of Manulife US REIT, but it’s pretty scary to see such numbers.
Why has its property value fall so much? What exactly is going on with Manulife US REIT?
Is its dividend yield of 18.3% sustainable? And should investors rejoice at such distressed bargain opportunity?
To figure this out, we need to look closer into Manulife US REIT’s assets.
A Background of Manulife US REIT
When the REIT got listed in 2016, it only owned three grade-A offices.
By last year, it actively grew to 12 properties.
When I drilled deeper into Manulife US REIT’s properties, they are quite solid.
A closer look will tell you these are prime, freehold properties located across the US – California, Washington, DC, New Jersey and Atlanta.
In fact, back in 2019, Manulife US REIT’s averaged a 97% occupancy rate, which is very good for US offices.
What’s more, Manulife US REIT’s also has a good mix of government and corporate tenants — including Hyundai Capital, the US Treasury, the United Nations and Amazon.
But the COVID pandemic made hell for everyone.
Even Keppel Pacific Oak US REIT and Prime US REIT, also struggled to keep their occupancy up:
The good thing is Keppel Pacific Oak and Prime managed to retain their key tenants.
Manulife US REIT is one unlucky bird — but still locking in healthy tenants
But it’s not so good news for Manulife US REIT — it just so happened last year, two of Manulife US REIT’s big tenants, TCW and Quinn Emmanuel Trial Lawyers have decided to move out of Figueroa (one of Manulife US REIT’s largest assets).
- TCW will leave Figueroa after staying for 31 years, to avoid a major renovation.
- Quinn Emmanuel Trial Lawyers will reduce their space in Figueroa.
Both tenants’ exit came at the same time when the Federal Reserve did the nasty thing to financial markets – hike interest rates.
The double whammy of major tenants leaving and rising rates left Manulife US REIT’s property valuation to get hit so badly.
To be fair, I think Manulife US REIT is one unlucky bird.
Now, TCW and Quinn Emanuel have stayed for a long time at Figueroa.
So the rent they have always paid is still below market rates.
Which means, Manulife US REIT can lock in new tenants at a newer, higher rental rate, which could improve their rental income.
I believe Manulife US REIT can.
You see, even though Quinn Emanuel reduced their leasing space, the law firm actually had to renew the remaining lease for another five years at a 2.5% rent increase.
Also, Manulife US REIT’s Diablo property has managed to raise occupancy from 85.7% to 91.1%, after it signed a 10-year lease with a semi-conductor company, with a much higher rent.
These showed that Manulife US REIT’s properties’ inherent quality.
Well, I’ll argue Manulife US REIT still has a strong quality of assets.
Manulife US REIT potential “force sell” — dividends may get cut
But it doesn’t solve the problem of their high gearing and their upcoming debt they have to refinance.
At some point, they have to “force sell” these assets in order to lower their gearing ratio.
Manulife US REIT has already appointed a financial advisor to help them restructure their assets.
And this could only mean one thing: a major dividend cut.
US office macro still weak
The other thing is, despite Manulife US REIT scored some success to secure some big leases mentioned earlier, it’s hard to ignore US office macro risks today.
Put it this way, US offices are still giving mixed signals in the rental market.
Plus, Manulife US REIT has also said it’s hard to tell where the trends are going in the submarkets.
Will rents pick up?
Will it remain sluggish?
It’s hard to tell.
What’s more, US class A & B office occupancy has continued to dip to 85%.
While I believe at some point it will recover, there’s no clear indication it will be anytime soon.
I feel Manulife US REIT could struggle to bring their occupancy back to pre-COVID levels.
Manulife US REIT used to grow their dividends healthily when their occupancy is at 97%.
Are Manulife US REIT dividends sustainable in today’s condition? I’d be lying if I said yes.
Another big risk here is Manulife US REIT could simply just throw in the towel, call for a privatization.
At today’s market cap of just US$550 million, it can simply call on their sponsor to take them out of the stock market.
The bad news is – unitholders who have long held their shares since IPO at US$0.82 will suffer massive losses.
Not the kind of situation I like to be in.
My Final Thoughts — Manulife US REIT worth buying?
At one point, Manulife US REIT shares peaked US$1.05. And the REIT has also dished out healthy dividends for their unitholders.
Yet today, Manulife US REIT shares have fallen by more than 60% since it got listed.
I don’t think Manulife US REIT’s situation is as bad as they seem — not in the “vulture circling dead bodies” kind of way.
But I also don’t think I’m willing to put money in such a tricky situation where its considering to restructure their assets.
That could potentially see their assets getting downsized, and their dividends getting cut. That will be an ugly thing for dividend investors.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan