Manulife US Reit abandons H1 distribution; all loans reclassified as current liabilities

SINGAPORE – Manulife US Real Estate Investment Trust (Reit) declared no distribution for the first half-year ended June 30, as the Reit has breached banks’ unencumbered gearing ratio, causing all its loans to be reclassified as current liabilities.

The manager of the Reit reported on Monday a 17.4 per cent decline in distributable income to US$37.9 million (S$51.3 million) in the first half of 2023 from US$46 million in the corresponding year-ago period.

Net property income for the same period dropped 3.9 per cent to US$55.4 million from US$57.6 million in the first half of 2022.

Revenue dropped marginally by 0.8 per cent to US$99.6 million from US$100.4 million in the same period a year ago.

The loss of net income was largely attributed to the “lower rental and recoveries income from higher vacancies along with the sale of Tanasbourne (office campus) in April 2023, higher property operating expenses such as repair and maintenance, property taxes and utilities as well as higher finance expenses”, the Reit manager said.

The Reit’s portfolio occupancy declined slightly to 85.1 per cent as at June 30, from 88 per cent at the end of 2022, largely due to non-renewals at Diablo Technology Park in Arizona and the Capitol office building in California. Finance expenses, on the other hand, increased to US$21.7 million from US$15.3 million in the first half of 2022.

The loss in income “was partially offset by higher lease termination fee income and higher parking income”, added the manager.

The financial covenant in Manulife US Reit’s loan agreements provides that the ratio of consolidated total unencumbered debt to consolidated total unencumbered assets should be not more than 60 per cent.

After reporting a higher ratio of 60.2 per cent on July 18, the Reit lowered its bank unencumbered gearing ratio to 59.7 per cent via a good faith payment in August.

However, to rectify the breach of the financial covenant, the Reit needs to obtain an expressed waiver from the lender banks. These negotiations are ongoing.

“Together with our sponsor, we are negotiating with our lenders to address the breach and embark on a plan to bolster the Reit’s liquidity needs, be it the potential disposition of Phipps Tower or a potential alternative method,” said Mr Tripp Gantt, chief executive officer of Manulife US Reit.

As at June 30, Manulife US Reit’s aggregate leverage ratio stood at 56.7 per cent.

Its manager said the high gearing ratio was the result of a decline in portfolio valuation, which is beyond its control. The manager emphasised that according to the Property Funds Appendix issued by Monetary Authority of Singapore, the gearing ratio will not constitute a breach of the authority’s gearing limit.

Units of Manulife US Reit were trading down 0.5 US cent, or 5.2 per cent, to 9.1 US cents as at 10.56am on Monday after the announcement.

THE BUSINESS TIMES