Manulife US REIT lays out recapitalization plan to avoid liquidation

By Marisa Wong

Los Angeles, Nov. 29 – Manulife US Real Estate Investment Trust issued a notice about a recapitalization plan that follows from negotiations among its manager Manulife US Real Estate Management Pte. Ltd., sponsor Manufacturers Life Insurance Co. and the lenders of its existing credit facilities.

Manulife US REIT outlined key terms for a waiver of the breach of a financial covenant under its existing facilities and a funding plan being put together by the manager to revitalize and reinforce the REIT.

The funding plan comprises $235.7 million aggregate funding by the sponsor through acquisition of property under a proposed divestment and granting of a loan by the sponsor; utilization of $50 million from the REIT’s own cash holdings; and raising minimum aggregate net sale proceeds of $328.7 million from asset disposals.

These transactions would strengthen the REIT’s balance sheet and create sufficient liquidity to fund essential capital expenditure budgeted for the financial year ending Dec. 31, 2024 and the financial year ending Dec. 31, 2025.

The REIT noted that some terms of the restructuring of the existing facilities, including a waiver of the breach of the financial covenant, are conditional upon approval by its unitholders.

If unitholders do not approve any of the resolutions, the existing facilities would remain in breach, and the lenders would have the right to accelerate the payment of all $1,023,700,000 of loans immediately.

In that case, the REIT will not have sufficient cash to repay all of the existing facilities and would need to conduct an expedited liquidation of its portfolio.

In addition, not passing the resolutions effectively means that unitholders would be voting to put control of the REIT in the hands of the lenders, the REIT warned.

The lenders would then have the right to call the outstanding debt due and could make an application to liquidate the REIT, thereby also forcing an expedited liquidation.

As of Nov. 29, not all 12 lenders have obtained the necessary approvals in relation to the restructuring of the existing facilities and the waivers in relation to the breach. The remaining lenders who have not yet obtained the necessary approvals are still in the process of obtaining their internal approval based on their meeting schedules.

In the event that any one of the remaining lenders does not obtain their internal approval, the consensual loan restructuring would not proceed, and the lenders have the right to accelerate the payment of all of the loans immediately.

The manager is currently targeting to obtain approval of all lenders before the extraordinary general meeting of unitholders scheduled for 1:30 a.m. ET on Dec. 14.

Covenant breach

Manulife US REIT experienced a 14.6% decline in fair market value of its portfolio for the first half of 2023, which increased its aggregate leverage to about 57% as of June 30.

This has resulted in (i) a breach of a financial covenant contained in the existing facilities which states that the REIT must at all times ensure that the unencumbered gearing for any measurement period is not more than 60% and (ii) the aggregate leverage of the REIT exceeding the aggregate leverage limit of 50%.

Recapitalization plan

Proposed key terms include, among others, the following:

• Divestment of a property from indirect wholly owned subsidiary Hancock S-REIT Chandler LLC to John Hancock Life Insurance Co. (USA) for about $98.7 million;

• The sponsor granting a $137 million unsecured loan for a period of six years at an interest rate of 7.25%;

• Proceeds from the divestment, the sponsor loan and cash holdings to be used to pay down about $285 million of debt on a pari passu basis;

• All loan maturities of the existing facilities to be extended by one year;

• Lenders waiving all past and existing breaches in the respective facility agreements;

• Temporary relaxation of financial covenants up to the earlier of (i) Dec. 31, 2025 and (ii) when unencumbered gearing is no more than 80% (compared to 60%) and the bank ICR is no less than 1.5x (compared to 2x).

The Singapore-based REIT invests in a portfolio of office real estate in the United States.

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