Manulife US REIT (SGX:BTOU)’s sharp valuation decline indicates that the US office market remains in a state of flux, and that our earlier view of a potential recovery in 2H22 was misplaced.
Manulife US REIT reported worse-than-expected asset value decline of ~11%, bringing its gearing to the edge of ~49%,
This was driven mainly by Figueroa, Los Angeles which saw a 33% drop in value, accounting for 48% of total value decline. This was mainly due to:
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downsizing of another Quinn Emanuel, and
the cap rate rising by 100bps.
On a blended basis, discount rates and terminal cap rate assumption by valuers are ~40-50bps higher. This was on the back of a sharp spike in rates, office transactions coming to a near-standstill in 2H22 due to the lack of interest, and banks pulling back on financing.
Other assets of Manulife US REIT which saw a double-digit percentage valuation decline include Plaza, Exchange in New Jersey, Penn and Centerpointe in Virginia highlighting the greater impact in gateway cities while secondary markets fared relatively better.
Manulife US REIT's gearing is at the edge of ~49%, the highest currently among S-REITs and closer to the maximum allowed threshold limit of 50%. Its interest cover ratio (ICR) as at end-Dec 20222 was estimated at 3.1x.
S-REITs are allowed a maximum gearing of up to 50%, provided the ICR is above 2.5x and up to 45% if the ICR is below 2.5x. As interest rates have spiked up sharply since 2H22, we think the ICR could drop below 2.5x by end-2023 – indicating that remedial measures are needed soon.
Will sponsor Manulife lend support?
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Above is an excerpt from a report by RHB Securities Research. Clients of RHB may be the first to access the full PDF report @ https://www.rhbtradesmart.com/.
