SIAS Questions to Manulife US REIT

Date: December 6, 2023

To: Chairman & Board of Directors

Mr Tripp Gantt, CEO

Manulife US REIT

SIAS had a meaningful dialogue session with the Sponsor and Senior Management of Manulife US REIT (MUST) this afternoon with 309 unitholders attending this virtual session. There were relevant questions posed and good conversation between the unitholders, Sponsor and Senior Management. We should be pleased if you could provide us with the replies to the following questions for the benefit of the MUST Unitholders, who were not present at the dialogue session to make an informed decision when voting for the resolutions at the EGM.

The Recapitalisation Plan (dated 29 November 2023)

Prior to 29 November, the manager did not provide unitholders with any details of how it will recapitalise the group. The proposed sponsor-lender loan was announced on 29 November 2023, along with the 148-page circular. It seems to suggest that the manager has in fact decided to take the sponsor loan from perhaps a month ago as all the nitty-gritty details of the sponsor loan was published right after the REIT announced the proposed sponsor-lender loan.

Questions

Did the manager make an announcement as soon as possible to inform the market of this material development?
The manager only disclosed the comprehensive details in a 148-page circular after the plan had been fully developed and finalised. By doing so, was there a significant risk of the proposed recapitalisation plan leaking, the potential establishment of a false market, and/or insider trading during this period?
Did the manager find the trading pattern to be unusual given that the unit traded as low as 4.9 cents in early November and as high as 10.5 cents before the plans were announced?
Mr Feliciano, you were recently redesignated as the non-executive, non-independent chairman of the manager to replace Mr Stephen James Blewitt. Is there any link between the cessation and the proposed plan? More importantly, what roles did the directors, especially the independent directors, play in coming up with the proposal?

Specifics of the sponsor-lender loan

Mr Gantt, apart from the divestment, the sponsor is offering the REIT a six-year loan of US$137 million at an interest rate of 7.25% and an exit premium of up to 21.16%. For a loan of US$137 million, the REIT will pay the sponsor as much as US$89.4 million.

Questions

Why is the REIT paying the sponsor an exit premium? An “exit premium” is unheard of in this part of the world.
Given that the manager is conflicted, how was the interest rate (and exit premium) negotiated? How did the board ensure that the interests of unitholders are taken care of, and in fact, prioritised over those of the REIT manager and the sponsor? Has the manager prioritised the interests of unitholders over those of the REIT manager and the sponsor?
What are the challenges to a rights issue now? Even with a 9.8% cap on ownership, why can’t the REIT carry out a rights issue where all unitholders have the rights to participate?
Is the manager concerned with the potential risk of losing control of the REIT?

Acquisition of Park Place

Mr Gantt, Park Place was recently acquired by the REIT at the end of 2021 for US$106 million. It is a fairly recent acquisition, one which the manager hailed as the next phase of growth for MUST. It was supposed to fortify the portfolio and was said to be an accretive acquisition. The asset will now be sold to the sponsor at US$98.7 million.

Questions

Even as late as December 2021, did the manager under-estimate the extent of the REIT’s problem? Did the manager grossly misread the market?
How is the manager being held accountable for this mis-step that resulted in a loss of US$7.3 million and placed the REIT in further financial stress?

Alignment with unitholders

Mr Gantt, what if I get a call from my members who are also Unitholders tomorrow and they say to me:

“You know, David, we look at the proposed recapitalisation plan by Manulife US REIT. The sponsor seems to be kicking the can down the road again and is praying for a recovery two years down the road. In fact, they also want to take the last bite of whatever is left. They get paid 7.25% per annum on the loan. They even want an exit premium of up to 21.16%. Unitholders are told that there will be no distributions until 2026. The sponsor will continue in place even though their track record has been dismal for unitholders like us. We are already down 95% and have lost 6 figures. Can we trust them to deliver positive results from here? Or should unitholders reject this lop-sided plan and put the REIT into Chapter 11? We may even have more trust in the bankruptcy proceedings in the United States than this proposed recapitalisation plan.”

Questions

So, Mr Gantt, what can I say to members? Should unitholders continue to trust the manager when it appears that there is so much misalignment?
Are unitholders asked to sacrifice while the manager and the sponsor maintains status quo, or in fact, profit from this situation?
What is the manager giving up? What is the sponsor giving up?

David Gerald

Founder, President & CEO

SIAS

Click here to see reply from Manulife US REIT