Manulife US REIT's gearing rises further to 49.5%, Mirae proposal expected in 2Q2023

Gearing is up from 48.8% at the end of 2022, "mainly due to payment of 2HFY2022 distributions in March 2023", says the manager.

As at April 18, aggregate leverage at Manulife US REIT (MUST) BTOU stands at 49.5%, just shy of the 50% limit, and up from 48.8% at the end of last year.

The REIT divested its Tanasbourne property in April for a consideration of US$33.5 million ($44.6 million).

According to the REIT’s results for 1QFY2023 ended March 31, “gearing rose q-o-q mainly due to payment of 2HFY2022 distributions in March 2023”. MUST paid out $38 million in distributions for 2HFY2022 ended December.

The elevated gearing inhibits funding of capex and tenant incentives for leasing via debt, adds MUST in a May 11 announcement.

The REIT has US$39.7 million of debt due this year, a revolving credit facility (RCF) drawn in 4Q2022 “mainly for capex funding”. While the loan utilised is due for rollover in 2023, the manager says it has the option to roll over the RCF up to the facility’s final maturity date in 2024. Following that, the REIT has US$143.0 million in debt due in 2024.

The sale of its Tanasbourne property was part of MUST’s strategic review, unveiled last year and led by financial adviser Citigroup Global Markets Singapore. The REIT’s gearing remained high throughout 2022 but came under increased scrutiny in December when an overall decline in portfolio valuation brought aggregate leverage near the limit.

The REIT’s manager revealed in April 12 that discussions with its potential acquirer Mirae Asset Global Investments are still ongoing. On May 11, the manager says due diligence is “substantially completed” and the parties are currently negotiating key terms.

Mirae will subscribe for more than 9.8% of new units to recapitalise MUST, reduce gearing and provide stability and growth, subject to unitholders' approval.

The REIT’s manager targets to complete the sale by early-3Q2023, with sponsor Manulife retaining its 9.1% stake. “As a placement to Mirae is subject to unitholder approval, there is also preparation of documentation for regulatory clearance prior to convening of extraordinary general meeting. We are working expeditiously and aim to update unitholders with the finalised proposal by 2Q2023.”

A potential rights issue could also be on the cards; the REIT’s manager highlights its answer to a popular question from investors. “A rights issue remains a viable option and all unitholders are able to participate. Our considerations include investor appetite and the sponsor’s 9.8% unitholding limit. Banks have indicated that they are only willing to underwrite an equity fundraising if the majority of the rights issue was backstopped.”

1QFY2023 figures

MUST’s interest coverage ratio is 2.9x, above the regulatory minimum of 2.5x. As at March 31, MUST’s weighted average interest rate is 3.98%, up 24 basis points from the previous quarter, and fixed rate loans make up 80.2% of its debt portfolio.

MUST’s occupancy of 86.1% as at April 18 is down from 88.0% at the end of 2022.

During the quarter, MUST signed 348,000 sq ft of leases, representing some 6.4% of portfolio net lettable area; while portfolio weighted average lease expiry stands at 5.0 years, up from 4.7 years in the previous quarter. MUST reported rent reversion of +5.0% for the quarter.

Units in MUST closed 1.4 US cents lower, or 8.54% down, at 15 US cents on May 10.

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