Manulife US REIT share price in crisis

All hell breaks loose for Manulife US REIT share price. The last time that I wrote about Manulife US REIT share price was on 17 November 2019. That was before the onset of the pandemic. Fast forward to 25 August 2023, Manulife US REIT share price plunged to a terrifying low of US$0.071 as the S-REIT fights for its life in ICU. What has gone so awfully wrong for this S-REIT?

There are investors who claim that investing in S-REITs is straightforward. Some even claim that S-REITs are relatively safe due to their investment structures. But over the years, look at what happened to Eagle Hospitality Trust, Dasin Retail Trust, EC World Trust, Lippo Mall Indonesia Retail Trust and First REIT? Investors must realize that there are risks involved, such as quality of sponsor, currency risk, portfolio concentration risks, geopolitical risks, consumer trend, etc.

For Manulife US REIT, investors are in for a wild ride as the S-REIT could either end up like the infamous Eagle Hospitality Trust or stage a magnificent turnaround. For sure, there are a few investors betting on a fairy-tale recovery of Manulife US REIT share price. Their convictions are not entirely based on blind faith as the counter had staged similar rebound after the US Federal Reserve slashed interest three times in 2019. Nonetheless, things are not so straightforward this time round.

Back in 2018, there was no pandemic and the concept of working from home was not so prevalent. As such, Manulife US REIT enjoyed high occupancy rate of 97.3%. However, the situation now is very different for the US office sector. The eleven consecutive US Federal Reserve interest rate hikes had led to concerns of a commercial real estate debt crisis in US as office defaults rose. As at 14 August 2023, the S-REIT had a committed occupancy rate of just 85.1%.

To compound matters, the underlying assets are all based in United States. This presents a significant portfolio concentration risk. In comparison, Mapletree Logistics Trust has a portfolio of 193 properties diversified across various countries in Asia-Pacific – Singapore, Australia, China, Hong Kong SAR, India, Japan, Malaysia, South Korea and Vietnam. The key lesson for investors of S-REIT is that they must not downplay the risk of portfolio risk as it could make or break their investments.

If investors look back, trouble started brewing for the S-REIT sector when US Federal Reserve began to hike interest rates by a whopping 150 basis points between June to July 2022. During that period, Manulife US REIT share price started to crash, falling from US$0.60 in June 2022 to the current abysmal US$0.071. Given the record low Manulife US REIT share price, it must be tempting for investors to buy the shares now. However, a word of caution is that the worst may yet to come for Manulife US REIT share price. I will also share my insights on why the appearance of a white knight would not save the S-REIT due to a unique feature in Manulife US REIT.Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. Furthermore, I am not vested and have never invested in this counter before. Whether Manulife US REIT share price will surge or collapse has no impact on me. Thus, this article is not meant to induce readers to make any form of investment decisions.

Manulife US REIT share price in financial trouble

On 19 July 2023, Manulife US REIT share price collapsed to US$0.11 after the manager revealed that its financial covenant breached the 60% limit due to the decline in its property valuations, which dropped 14.6% to US$1633.55 million. What does this mean and what is the significance of this event?

Basically, an S-REIT is a leveraged entity as the amount of bank loans that it could obtain is based on the valuation of the underlying properties. The principle is similar to the Loan-to-Value (LTV) ratio that the government allows you to borrow to fund the purchase of your home. Take for example, you bought a private property for $1 million and the maximum loan you could borrow is $750,000. Now assuming that a financial crisis struck and the bank decided to conduct an evaluation of your property. It was determined that your property was worth about $700,000. To maintain the LTV ratio, the bank may do a margin call and made you top up the shortfall of $50,000.

The majority of existing loans of Manulife US REIT contain a [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]

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