THE decision by the manager of Manulife US Reit : BTOU 0% to conduct a strategic review &ndash just six years into its listing on the Singapore Exchange (SGX) &ndash is a bold move.

 

On one hand, some in the market might take it as an admission of failure.

 

That the value of a real estate investment trust (Reit) &ndash backed by a strong global sponsor, no less &ndash should have collapsed to the extent it did suggests the Reit was not built on a sturdy foundation in the first place.

 

On the other hand, the manager of the US-focused office Reit should be lauded for its willingness to admit it needs a makeover &ndash and to attempt a pivot before it is too late.

 

In fact, other Singapore-listed Reits (S-Reits) could do with strategic reviews too.

 

A look at the 10 S-Reits trading at the steepest discounts to their net asset values (NAVs) per share reveals that, like Manulife US Reit, the majority are focused on a single asset class within a single geographical location.

 

At the bottom of the table are shopping mall landlords Dasin Retail Trust : CEDU +2% and Lippo Malls Indonesia Retail Trust : D5IU +3.45% (LMIRT), whose assets are, respectively, in China and Indonesia.

 

Dasin Retail Trust is trading at a whopping 80 per cent discount to NAV, while LMIRT is trading at a 67 per cent discount.

 

Others on the list include US-focused hotel operator ARA US Hospitality Trust : XZL -5.26%, China-focused industrial Reit EC World Reit : BWCU -1.12%, and Manulife US Reit&rsquo s US office Reit peer Prime US Reit : OXMU +1.08%.

 

Among the S-Reits that are trading at the biggest discounts to book value, only two have portfolios comprising various asset classes in more than one location.

 

These are diversified Reits OUE Commercial Reit : TS0U -1.39%, which has properties in Singapore and China, and Cromwell European Reit : CWBU -0.64%, whose assets are spread across several countries in Europe.

 

It would appear, therefore, that the market views diversification with some favour.

 

This makes sense, as portfolios with mixed asset classes and geographies have the ability to provide greater balance and stability.

 

A diversified portfolio would mean unitholders miss out on outperformance when a particular asset class or country is on an upcycle, as pure-play Reits would be the greatest beneficiaries.

 

But in periods of extreme and widespread volatility &ndash such as the market currently facing &ndash there is significantly less uncertainty.

 

This is particularly true of pure-play Reits with assets that are based primarily overseas.

 

As one Reit analyst shared with The Business Times: &ldquo Pure-play Reits with a single asset class in a single geography may be seen as riskier. But if they are Singapore-centred, would you say the same thing?&rdquo

 

For Reit managers, a relook at a Reit&rsquo s longer-term strategies is not a bad thing.

 

&ldquo I think Reit managers should periodically undertake a strategic review of their portfolio &ndash whether internally or with an external adviser &ndash as the market conditions and operating environment constantly evolve and change with the passage of time,&rdquo said Morningstar analyst Xavier Lee.

 

&ldquo For Reit managers to maintain the performance of their Reits, they will need to constantly review their portfolio, divest non-core assets and recycle the capital into better growth opportunities,&rdquo he added.

 

Not all Reits need to go exactly the way Manulife US Reit has, though.

 

Veteran Reit investor Gabriel Yap suggested that the worst-performing Reits should do &ldquo an in-depth self-examination&rdquo of themselves and their directions. &ldquo There is no need for (formal) strategic reviews as that means paying bankers using distribution income meant for shareholders.&rdquo

 

Certainly, any reasonably informed Reit investor would be able to tell that some S-Reits have unsustainable strategies or business models.

 

" We' re taking a look at all of our options at this point," says Tripp Gantt, CEO of Manulife US Reit .

 

POTENTIAL recommendations from the ongoing strategic review for Manulife US Reit : BTOU 0% include the divestment of underperforming assets as well as diversification into new asset classes and geographies.

 

But market watchers say implementing the recommendations may not be as straightforward as it seems.

 

At a briefing accompanying its operational updates for the third quarter ended September, the manager of Manulife US Reit had announced that it had formed a strategic working group to assess &ldquo opportunities&rdquo amid persistent headwinds in the US office sector.

 

&ldquo We&rsquo re taking a look at all of our options at this point,&rdquo said Tripp Gantt, chief executive officer of the manager of Manulife US Reit, at the briefing. &ldquo These headwinds continue, and we&rsquo re just really fighting through them right now.&rdquo

 

&ldquo If we continue doing the same things, we&rsquo re going to get the same results. So we need to take a really strong look at everything that we can do to provide the best opportunities for the Reit and the unitholders going forward,&rdquo he added.

 

The manager of the real estate investment trust (Reit) has appointed Citigroup Global Markets Singapore as its financial adviser for strategic review, which comes just six years after Manulife US Reit&rsquo s initial public offering (IPO) on the Singapore Exchange (SGX) in May 2016.

 

As at 3.30pm on Dec 7, the Reit is trading 56.6 per cent below its IPO price of US$0.83. It has generated an annualised total return of negative 4.7 per cent since its inception.

 

&ldquo The strategic review is quite timely,&rdquo said DBS analyst Rachel Tan, noting that the Reit is relooking its longer term strategy amid concerns over the macro economy and potential recession in the US.

 

The way RHB analyst Vijay Natarajan sees it, the key near-term focus for the management should be to lighten its balance sheet and actively focus on improving operations at its assets.

 

As at end September, Manulife US Reit&rsquo s gearing stood at 42.5 per cent, inching up marginally from 42.4 per cent at end June.

 

Meanwhile, portfolio occupancy dipped 1.9 percentage points quarter-on-quarter to 88.1 per cent.

 

&ldquo We believe a good outcome for Manulife US Reit unitholders from the strategic review would be the sale of some of its office buildings in gateway cities that are no longer relevant or attractive enough to tenants in the new hybrid model, even if it means selling at a slight discount (of around 5-10 per cent) to book value,&rdquo Natarajan said.

 

Natarajan noted that this will lower Manulife US Reit&rsquo s gearing, while limiting the need to pump in additional capital expenditure to attract tenants to these assets. &ldquo Alternatively, the Reit could also explore selling stake in assets to long-term players such as insurance or pension funds,&rdquo he added.

 

Gabriel Yap, a veteran Reit investor and chairman of investment firm GCP Global, agreed that divestments should be at the top of the recommendations from the strategic review.

 

&ldquo My top recommendation is to sell the worst performing assets as Manulife US Reit&rsquo s current share price has traded way below net asset value (NAV) for years now,&rdquo Yap said.

 

&ldquo The basic rule in Reits investing is: make acquisitions with equity if the share price is higher than NAV, and do disposals to raise equity if the share price is below NAV,&rdquo he added.

 

DBS&rsquo s Tan noted that the management has already been &ldquo talking about divestments for a while&rdquo now.

 

However, she says it might not be easy for Manulife US Reit to divest its underperforming assets at this time.

 

&ldquo Divestments are a near term help, especially now that their gearing is above 40 per cent. But, unfortunately, I don&rsquo t think the market is ready for a divestment,&rdquo Tan said. &ldquo The transaction market has gone quiet in view of the macroeconomic uncertainty &ndash not just in the US, but globally.&rdquo

 

&ldquo There may be more opportunities for them to divest when the market returns,&rdquo she added.

 

Another option that the manager of Manulife US Reit will be mulling is the diversification of its portfolio &ndash both geographically beyond the US as well as into other asset classes.

 

Gantt noted in the briefing that acquisitions the Reit manager made at the end of 2021 began to pivot the portfolio away from high rise office buildings to &ldquo a different kind of office product&rdquo .

 

Tan said Manulife US Reit could consider branching out within the office subsector space, such as into business parks. &ldquo But if they were to move to other asset classes, such as retail or industrial, they would probably need to build scale and expertise in managing these asset classes,&rdquo she said.

 

RHB&rsquo s Natarajan said another possibility is Manulife US Reit bringing in a long-term strategic shareholder with complementary asset classes as a partner. These could include property funds or local developers with assets in the industrial or multifamily space, he said.

 

&ldquo This will help in diversification and broaden its asset class as well as strengthen its balance sheet,&rdquo Natarajan added.

Manulife US Reit is looking into the recycling of assets and diversification into other asset classes and geographical markets. 

MANULIFE US real estate investment trust (Reit) has chosen Citigroup Global Markets Singapore as its financial adviser for the group&rsquo s strategic review announced in its in third quarter business update, it said on Friday (Nov 25).

 

This comes after the reit said it would be exploring options to enhance shareholder value, through the formation of a new strategic working group comprising the senior members of the manager and the board of the manager.

 

Options listed by the reit include a recycling of assets and the diversification into other asset classes and geographical markets. These come amid persistent headwinds in the US office sector as renewal of office leases by existing tenants fell to &ldquo historic lows&rdquo .

 

Citigroup will thus assist the strategic working group in its review, said the reit&rsquo s manager.

 

However, there is no assurance that the reit will implement any of the options identified through the strategic review. Further announcements would be made if there were any &ldquo material developments which warrant disclosure,&rdquo said the manager.

 

CITING higher financing costs, analysts have lowered their target prices for Manulife US Reit : BTOU 0% while maintaining their &ldquo buy&rdquo calls.

 

CGS-CIMB reduced its target price from US$0.78 to US$0.69 as they revised their earnings estimates on the Reit, coupled with a higher cost of equity assumption. Its analysts Lock Mun Yee and Natalie Wong also lowered their forecasted distribution per unit (DPU) for FY2022 by 2.1 per cent to US$0.05, noting that the Reit&rsquo s all-in cost of funds rose to 3.3 per cent, with interest cover of 3.4 times as the quarter ending Sep 30.

 

Meanwhile, RHB lowered its target from US$0.78 to US$0.64 after factoring in higher-than-expected financing costs, in particular for the refinancing of loans amounting to US105 million maturing in 2023. The brokerage believes interest cost for this tranche is likely to come in between 100 and 150 basis points higher than the current 3.3 per cent. It forecasts a DPU of US$0.052 for FY2022.

 

Manulife US Reit had on Wednesday (Nov 2) reported a drop in portfolio occupancy to 88.1 per cent, from 90 per cent as at end-June. RHB analyst Vijay Natarajan noted that a &ldquo flight to quality&rdquo trend, with tenants more willing to pay higher for good quality office spaces, could improve the leasing momentum moving forward.

 

However, CGS-CIMB said that the Reit&rsquo s occupancy could come under pressure in the medium term, with major tenant TCW Group deciding to vacate its space in the Figueroa property when its lease expires in December 2023. Lock and Wong also highlighted that the protracted slowdown in the US economy could dampen appetites for office space.

 

In maintaining RHB&rsquo s &ldquo buy&rdquo call, Natarajan noted that the challenges faced by gateway city offices have been priced in, with units of the Reit trading at a &ldquo distressed valuation&rdquo of 0.5 times price to book value (P/BV) multiple, and with a projected forward yield of about 15 per cent.

THE manager of Manulife US Real Estate Investment Trust : BTOU 0% (Manulife US Reit) has formed a strategic working group to assess &ldquo opportunities&rdquo &ndash including the recycling of assets and the diversification into other asset classes and geographical markets &ndash amid persistent headwinds in the US office sector.

 

&ldquo We&rsquo re taking a look at all of our options at this point,&rdquo Tripp Gantt, chief executive officer of the manager of Manulife US Reit, said at a briefing on Wednesday (Nov 2), following the release of the Reit&rsquo s operational updates for the third quarter ended September.

 

&ldquo If we continue doing the same things, we&rsquo re going to get the same results. So we need to take a really strong look at everything that we can do to provide the best opportunities for the Reit and the unitholders going forward,&rdquo he added.

 

The strategic working group &ndash comprising members of Manulife US Reit&rsquo s board of directors and management team as well as representatives of the sponsor &ndash is &ldquo a serious step in that direction&rdquo , Gantt said.

 

The move comes amid sluggish leasing volume, while renewal of office leases by existing tenants fell to &ldquo historic lows&rdquo .

 

&ldquo We signed 61,000 square feet (sq ft) of leases in the third quarter, which was less than we&rsquo d hoped. But one of the bright spots was that we were able to see a 4.3 per cent positive revenue version in the third quarter,&rdquo Gantt said.

 

Including leases signed up to Oct 18, Manulife US Reit&rsquo s portfolio occupancy dipped 1.9 percentage points to 88.1 per cent, from 90 per cent as at end-June. The decline was largely attributed to Quinn Emanuel&rsquo s downsizing of about 71,000 sq ft at its Figueroa property.

 

Portfolio physical occupancy, the Reit manager added, was at the low 30 per cent range on a weighted average basis.

 

On the capital management front, Manulife US Reit&rsquo s weighted average interest rate rose to 3.34 per cent as at end-September, from 2.97 per cent as at end-June.

 

The Reit manager noted that every 1 per cent increase in interest rates would impact the Reit&rsquo s distribution per unit (DPU) by 0.105 US cents. This will represent a decline of about 4 per cent from its DPU of 2.61 US cents for the first half ended June.

 

Its gearing ratio stood at 42.5 per cent &ndash higher than most Singapore-listed real estate investment trust peers, but below the regulatory limit of 50 per cent &ndash with interest coverage of 3.4 times and a weighted average debt maturity of 3.1 years.

 

&ldquo Given these headwinds and all this continued uncertainty, we need to do something,&rdquo Gantt said. &ldquo Our top priority right now is really to strengthen our balance sheet and manage gearing.&rdquo

 

The Reit manager said it started a disposition process in Q2, which is still ongoing.

 

&ldquo Our focus in the beginning of these recycling efforts is to make sure that we&rsquo ve got the financial flexibility and the stability that we need to move forward,&rdquo Gantt said.

 

Gantt added that the strategic working group is also looking at diversification into other asset classes.

 

&ldquo The acquisitions that we made at the end of 2021 began to pivot us away from high rise office buildings to a different kind of office product,&rdquo Gantt said. &ldquo So we&rsquo re asking ourselves the questions: &lsquo Are we a 100 per cent office Reit?&rsquo ... &lsquo Is that the right way to go?&rsquo &rdquo

 

Over the long term, Gantt said the Reit manager is eyeing industries and property types that have secular tailwinds and less capital expenditure needs. Examples of asset classes that have these attributes, he added, could include industrial and multi-family properties.

 

He noted that the Reit&rsquo s sponsor has these types of assets in its real estate portfolios, as well as relationships with developers and operators of these property types.

 

In response to questions from analysts and the media, Gantt said Manulife US Reit will continue to focus on the US &ndash at least in the short term &ndash but does not rule out diversifying into other markets in the longer term.

 

&ldquo We obviously have the ability to do that (expand beyond the US) and it&rsquo s something that we&rsquo ve considered,&rdquo Gantt said. &ldquo It is an option for us and it is something that we&rsquo re monitoring and looking at.&rdquo