Date of Report: 30 September 2024
Broker: Lim & Tan Securities Pte Ltd
Capitol Mall Divestment
Manulife US Real Estate Investment Trust (MUST) announced the divestment of its property at 400 Capitol Mall, a 29-storey Class A office building located in Downtown Sacramento, California. The sale price was US$117.0 million to 400 CM Owner, LLC, an unrelated third party. The property, which spans 501,308 sq ft, is classified as a nonstrategic asset for MUST. The sale was finalized at a price in line with the independent valuation of US$118.0 million as of 1 September 2024.
Utilization of Sale Proceeds
MUST intends to use the net sales proceeds from this divestment, along with existing cash, to repay its US$130.7 million loans due in 2025 by the end of 2024. Post-repayment, MUST will not have any loan maturities until 2026. This move is part of MUST’s strategy to optimize its portfolio and strengthen its balance sheet.
Progress Towards Recovery
The Capitol Mall divestment marks a significant step in MUST’s “Recovery” phase, a key part of the company’s strategic roadmap. This sale helps MUST mitigate risks amid challenging market conditions, especially in the U.S. office real estate sector, which continues to struggle with debt availability and transactional hurdles. According to John Casasante, CEO and CIO of the Manager of MUST, the liquidity provided by this sale gives the trust the flexibility to meet its debt obligations and continue executing its portfolio optimization strategy.
Improvement in Leverage and Debt Costs
Assuming that the net sales proceeds and existing cash are fully utilized for loan repayments, MUST’s pro forma aggregate leverage is expected to improve to 54.2% from the previous 56.3%. Additionally, MUST’s weighted average interest cost is expected to reduce by approximately 42 basis points to 4.16%. The pro forma weighted average debt maturity will also be extended to 3.4 years from 3.0 years.
Milestone Achievement Under the Master Restructuring Agreement (MRA)
The sale of Capitol Mall contributes significantly towards the milestones set under MUST’s Master Restructuring Agreement (MRA). The divestment is expected to achieve 47% of the 2024 Net Proceeds Target of US$230.0 million and 33% of the 2025 Net Proceeds Target of US$328.7 million. MUST remains focused on meeting these milestones to enable a path towards recovery and long-term growth.
Overview of MUST’s Portfolio
Upon completion of the Capitol Mall divestment, MUST’s portfolio will comprise nine properties in the U.S. with an aggregate net lettable area (NLA) of approximately 4.6 million sq ft. MUST’s existing portfolio includes freehold office properties located in Arizona, California, Georgia, New Jersey, Virginia, and Washington D.C. The total portfolio was last independently valued at US$1.4 billion as of 31 December 2023.
Background and Sponsor
MUST is the first pure-play U.S. office real estate investment trust (REIT) listed in Asia, focusing primarily on income-producing office real estate in key U.S. markets. Its sponsor, Manulife, is a leading Canada-based financial services group with operations across Asia, Canada, and the United States. Manulife provides a wide range of financial services, including insurance, asset management, and wealth management products.
Current Valuation and Outlook
At the current price of US$0.124 per unit, MUST has a market capitalization of US$220 million, trading at a 0.3x price-to-book ratio. Despite the stock’s significant rise of 55% this year, there remains an estimated 25% potential upside based on Bloomberg’s consensus one-year target price of US$0.15. The successful completion of the Capitol Mall sale and meeting of debt obligations are seen as positive developments for MUST, strengthening its financial position while managing risks.
