Repost my MUST article dated30 dec for you hehe:
Be careful of Manulife US REIT
Manulife US REIT (MUST) today announced that the property valuations of their portfolio dropped by 10.9%, causing the gearing to increase from 42.5% as at 30 Sep 2022 to 49%! This is dangerously close to breaching MAS’s regulatory limit of 50% leverage!
According to MUST’s announcement, the decline in property valuations is primarily caused by higher discount rates and capitalization rates for certain properties due to deteriorating fundamentals at the property level, as well as declining performance in the submarkets where the properties are located due to weak demand and leasing activity, resulting in higher concessions and leasing costs.
I would like to remind and warn all Tigers to be very careful of MUST and other highly leveraged office REIT such as Keppel REIT and Suntec REIT. In such situation, MUST will most likely recapitalize itself by either doing a fire sale for its office assets at a large discount to purchased price or forced to do very dilutive equity fund raising from unitholders. Either action will be painful to investors, but there is little choice as MUST will risk breaching loan covenant or MAS regulations if it doesn’t do so. The risk is very high because MUST have already engaged Citigroup to “study” all options available.
US offices are in structural decline and will face a huge headwind in 2023. Based on Morgan Stanley’s study, office utilization rates are only 40-80% of pre-Covid levels (depending on city and region). The continued implementation of work-from-home policies will impact demand for office spaces, and uncertainty about the future of office absorption is likely to persist. Moreover, the labour market is experiencing slowdown now, with an increase in layoffs and hiring freezes. It will not bode well for US offices.
I advise Tigers not to be blinded by the high yield of MUST. There is a reason for this company to be trading so cheaply. MUST have already seen at least 6 quarters of DPU yoy declines. If MUST is forced to do a dilutive rights issue or do a fire sale, then the eventual DPU will be even worse. Good luck!
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