Manulife US Real Estate Investment Trust (BTOU) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining Manulife U.S. REIT's First Half 2023 Financial Results Media and Analyst Briefing. I'm Wylyn from the Investor Relations team. Earlier this morning, we released our first half 2023 financial results, and you can find the materials on SGXNet as well as our corporate website. Today's briefing is being recorded and streamed live. The audio webcast will be uploaded on our website after this briefing. For our analysts and media representatives joining us via MS Teams, I appreciate if you can keep your mics muted until the Q&A session. First, let me introduce the Manager team on the call today. We have our CEO, Mr. Tripp Gantt; Deputy CEO, Ms. Carol Fong; Mr. Robert Wong, our CFO; and Mr. Choong Chia Yee, our Head of Finance; and CIO, Mr. Patrick Browne, who is joining us from U.S. For today's briefing, we will start with the presentation of our half year performance by our CEO, Tripp. And after that, we will open for Q&A. Let me now hand it over to Tripp. Tripp, please.

Great. Thank you, Wylyn. Good morning, everybody. Thank you for joining. We'll go ahead and get into the presentation here. I think as everybody on this call is probably aware, we released our midyear valuation results, and our portfolio valuation was down by 14.6%. This did bring our MAS aggregate leverage up to 56.7%, which is above the 50% MAS limit. It also increased our unencumbered gearing ratio, which is the leverage calculation used by the banks in our loan agreements up to 60.2%. This 60.2% did exceed the 60% unencumbered gearing ratio limits in our loan covenants. It did result in a breach of those loan covenants at the 30th of June, and as a result, we will be halting our first half 2023 distributions. We'll be talking about all this in more detail here in these later slides. This just shows again that we will not be making the first half 2023 distribution despite the fact that we did have $37.9 million of distributable income for the half. This distributable income was down 17.4%, largely as a result of higher expenses, both finance expenses and expenses at the property level. In addition to lower income, as a result of higher vacancy in the portfolio and the sale of our Tanasbourne property in April of this year. And this slide just shows the NPI performance on a property-by-property basis. Again, lower in places due to lower income from higher vacancies and higher property operating expenses. Now the 14.6% valuation drop did result in our investment properties being valued at a little over $1.6 billion, which obviously had a downward impact on our adjusted NAV as well. But talking about the first half distribution, so we've halted the distribution because of the fact that our unencumbered gearing ratio breach did technically make all of our loans to be reclassified as current liabilities. According to MAS regulations, we have to certify it in order to make distributions, we have to certify that we can fulfill the liabilities of the REIT, as they fall due. Since all the loans have currently been classified as current liabilities, we cannot certify that at the moment, so we can't make the distributions right at this moment. We did make a good faith payment to our lenders to bring that gearing ratio below the 60% threshold, but the payment in and of itself doesn't cure the breach. The lenders actually have to waive the breach in order for that to happen. We are currently in negotiation and discussions with our lenders, and we're really focusing on working to generate proceeds to both pay down debt and fund CapEx, and other operating costs at the property level. Now something to keep in -- to keep in mind, the 56.7% MAS aggregate leverage and the 60.2% unencumbered gearing ratio, the calculations are slightly different. It may be confusing for some people. The MAS aggregate leverage is actually based on gross borrowings, as a percentage of our total assets. So it takes a look more at your complete financial picture, whereas the unencumbered gearing ratio that's used by the banks and calculating this for our loan documents and our loan covenants is our total borrowings essentially over the value of our portfolio, as a percentage of our portfolio, which is why it's higher. It's important to point out that even though we did exceed the 50% MAS leverage limit, it's not considered a breach since it was due to devaluation and market conditions that led to a devaluation. However, as we've said before, breaching the 60% unencumbered gearing ratio threshold did result in us breaching the loan covenants. On the right side of the slide, there are just a few other metrics. You can see that our interest coverage ratio is still above the 2.5 multiple that's required by the MAS to have a 50% leverage limit. We're at [ 2.6 ]. We did see our weighted average interest rate rise by about 12 basis points since the last quarter, but we have been somewhat insulated from interest rate increases due to the fact that 80% of our loans are hedged. Now looking at our portfolio performance, our occupancy declined about 100 basis points in the quarter, but we are seeing some increased activity in terms of leasing pipeline. I think it's going to take some time for this to work its way through to seeing our -- the number of leases that we signed go up, but we are seeing some positive signs in terms of tenants reaching out, requesting information about certain spaces, doing tours, and so we're hoping that, that will translate soon into increased leasing activity. We did have 443,000 square feet of leases that were signed in the first half, and this was largely due to the renewal of some large tenants in our portfolio. Since the end of June, we've continued some of that momentum going into July, signing about 20,000 square feet of leases since that time. And the rental reversions, even though they were slightly down for the second quarter have remained positive for the first half, and it's really just a property-by-property case-by-case basis about where those rents are going to be in positive reversion territory. The leases that we're signing have been for a relatively long WALE. We've got 7.6 years of WALE for the leases that were signed in the first half. Again, which shows us that tenants are beginning to get a grip or get an idea of what their space needs are going to be going forward and are feeling comfortable signing leases for longer periods of time. And this has really helped our WALE, our portfolio WALE remain strong at 4.9 years. We've been hovering around 5 years now for a while, and the leases that we're signing now are helping to maintain that. We do have a relatively well spread-out lease expirations, even though the leases coming due in 2024 and 2025 are a bit more than we've seen in past years. So we definitely have our work cut out for us in terms of getting ahead of that, engaging our tenants, looking for renewals, where available, and we're already working hard on the 2024 expiries. The in-place rental escalations, what we're seeing in terms of annual escalations, about 2/3 of our portfolio are on an annual escalation basis, and these are around an average of 2.6% per year, which we feel is about the same rate as stabilized inflation or higher than that. Looking at our top 10 tenants. Our largest tenant, The William Carter company at our Phipps property in Atlanta. As we announced in the last quarter, Carter's did choose to downsize from 278,000 square feet to 209,000 square feet. But we do have them now as the anchor tenant in that building until 2035, which we're pretty pleased by. The other thing that I'll point out is that the 69,000 square feet of space they vacated is in fantastic condition. It shows really well, we have had a good deal of tenant interest in that -- in those spaces, and the rent that was being paid by Carter was below market. And so we're hoping to have positive rental reversion when we are able to execute leases to fill that space back up. The next 2 tenants, unfortunately, we've announced previously the TCW Group is going to be vacating at the end of this year, and Children's Place, as we announced a few weeks ago, will also be vacating -- terminating their lease to exercise their early termination option at our Plaza property in New Jersey. We did receive a $4 million termination payment for that early termination. And we are already in discussion with some other tenants about potentially backfilling that space. And some of the tenants that we're -- potential tenants we're talking to are looking at not only taking all that space, but potentially additional space in the asset. If we were able to execute this successfully would actually result in us having a higher occupancy of Plaza, so we're working hard on that and hope to have some good news for you there in the coming weeks. So the 14.6% valuation drop, there were some similarities to the appraisals this time versus our year-end appraisals at 2022 -- at the end of 2022 namely the higher discount and higher terminal cap rates. And this is really a reflection of where investors are seeing risks in the U.S. office market, both for general U.S. economy, risks around the U.S. economy, but also specifically around commercial real estate. We also saw some of the softening of office demand impacting the valuations and higher vacancy assumptions and leasing cost assumptions in terms of the amount of money that you need to spend to both get in new tenants, sign new leases and fill space that might become vacant. One of the things that we did see in the year end appraisals last year were some strong relationships between geographic regions and the valuation declines, particularly our properties in Los Angeles, Washington, D.C. and New Jersey at our year end valuations saw the greatest decline. At the mid-year valuations, we didn't see the same kind of geographic relationships between the valuation declines. We did see that our 2 properties in the Phoenix, Arizona market, the Diablo and Park Place had the lowest overall percentage change in valuations. But other than that, we didn't see a lot of geographic correlations in the valuations. Our Plaza property in New Jersey, for instance, was our highest percentage drop of the properties in our portfolio. But as you notice on the right-hand side, the direct cap rates actually didn't move. And this was a case of the appraisers having the information about the Children's Place vacating and having to take into account the cost of refilling that space for a new tenant and the leasing cost assumptions with that impacted that valuation. The rest of the portfolio is really just a property-by-property kind of case-by-case basis. But across the board, we did see significant increases in cap rates and discount rates. Not that it does gives us any comfort, but it does appear that our office valuation -- I'm sorry, our valuation declines were in line with a lot of the benchmarks that we follow in terms of U.S. office valuations. NCREIF, which is an office subindex that we followed pretty closely showed 18.4% year-over-year declines. Green Street property -- commercial property price index had an estimation of 27% year-over-year declines. And so again, while it doesn't necessarily give us comfort, it does appear that our valuation declines are in line with other U.S. benchmarks and again, kind of give us justification for having carried out these mid-year valuations. This set of charts is, again, is something that you've seen over the past few quarters. This is proprietary research that JLL does for us. This is not nationwide data. This is data for just our submarkets, where our properties are located, and this is kind of a snapshot of the leasing conditions. Starting in that top left chart, you can see that leasing volumes are still down. They were up slightly quarter-over-quarter in our submarkets, but they're still at relatively historic low levels. Again, we're beginning to see some increased activity in terms of tenant interest, but it will take a while for that to work through in terms of leasing volume, I think. We are seeing some stabilization in terms of the lease terms that are being signed. As I mentioned, the WALE that we have for the tenants that we signed in the first half has been relatively healthy. But most importantly, if you look at the bottom left chart, we do see concession packages moderating a bit to tenants. That red line there is the TI allowance, which is the money that you actually give to a tenant to fit out their space when they sign a new lease. We had seen kind of a worrying uptick in that line at the -- through 2021 and 2022. Towards the end of '22, we saw that moderating, and we're actually beginning to see that come down a bit in 2023, which is a great sign. I do want to caution, however, I don't think that this means that it's becoming a landlords market necessarily. I think it just means that the TI has got to a point, where a lot of owners just -- it didn't make economic sense to pay those kind of TIs. And so I do think that we're seeing a reduction in the TIs for that reason. The capital outlay required of a property owner to fund these kind of TIs has just -- has reached a point to where it just doesn't make economic sense for a lot of landlords. So what we're seeing is still a slight increase in free rent. But in that chart on the top right is really where these things kind of come together. The difference between the base rents and the net effective rents and that delta is essentially the concessions that you have to offer to a tenant. As we've seen over the past few quarters, those numbers -- those lines are coming closer together, which is a good sign for us. and showing more stability. I do think that, that gap still shows that it's a tenant's market. The tenants are able to extract a lot from landlords in order to sign leases. But we do see that situation stabilizing. And again, as we look forward into the coming quarters, we hope to see those 2 lines coming even closer together. The last chart on the bottom right, if you follow the last few quarters, we've changed this chart a little bit. In the past few quarters, we've shown this chart, as an increase in the sublease space, this quarter, we're showing the actual volume of subleasing space that's available in our submarkets. And as you can see, that amount of sublease space hasn't increased a lot over the past couple of quarters, but it is at all-time highs, and it hasn't been going down very much, and a lot of that is related to that chart on the top left, in that leasing volume, the sublease space, keep in mind is actually competitive supply that's on the market. So if you're a landlord in this market and you have vacant space that you're trying to lease, you're actually competing with the sublease space. And so in some ways, it's almost like shadow vacancy. The sublease space is also often fit out high-quality space, lot of tenants can just move straight into those spaces. And so that competes with the vacant spaces that you have in your building. So this -- this inventory is something that we're watching really carefully, and hopefully, we'll see that come down in future quarters. Now I feel like we've been talking about the U.S. economy and a potential recession now for almost a [ year end ], but the U.S. economy just keeps on [ jogging ]. I mean, I do think that a lot of economists are predicting that we might be in a recessionary environment in 2024. Even though, I think the outlook for a soft landing, if you will, has increased and people are thinking that there's going to be a recession, it's likely to be somewhat shallow and short-lived. We continue to see positive GDP growth, even though that is lowering. Inflation does appear to be easing, getting closer to the Fed's target range. The Fed has been signaling that perhaps they're getting towards the end of their rate hikes. So we're continuing to see that the U.S. economy, while it's not completely out of the woods yet, I think it's been a lot more resilient than a lot of people may have predicted. Really, I think where we're continuing to see challenges is in terms of bank lending and the effect that this is having on commercial real estate. In the first half of 2023, office sales transactions in the U.S. fell 70% year-over-year, which lines up with what we've been saying for a while now that we just haven't seen office sales. It's a really difficult time in the U.S. office transaction market. We are continuing to see some stability or some clarity in terms of demand. Office attendance is up slightly. We've seen some mandates come out from the federal government saying that beginning in September, that the agencies need to start calling their people back to work. We're beginning to see more headlines of certain companies having return to work mandates. I don't think that any of us are expecting that most companies are going to come back 5 days a week. We do think that hybrid work is probably the new normal and here to stay. But we are beginning to see some clarity in terms of office space demands from a lot of tenants. But the leasing indicators still remain kind of mixed. As I said, even though we're getting more interest and traction from tenants at certain properties, a lot of those tenants are still remaining somewhat defensive in signing those leases. And I think that until we get through some of this uncertainty in the U.S. economy, we'll continue to have some tough challenges in terms of leasing. But we do see some positive, I say green shoots, but we are seeing some of those there. And lastly, the thing that's clear is that the flight to quality continues. The best properties in the best location are capturing the lion's share of leasing demand and it really does -- is going to keep us focused on the properties, where we think that we can really win by making the investments in our properties to see an uptick in that leasing demand. Now back to our REITs and really what we're focused on, again, I think that everybody is really focused on what we're going to do about this loan covenant breach and our plans to get through this. There's really 4 steps for us here right now. The first one is to get that unencumbered gearing ratio down below 60%. As I mentioned, we did make a good faith payment to our lenders last week to get that gearing ratio below 60%, but we're obviously going to need to come up with a longer-term plan in order to get this sustainably under those levels. And so we're really -- the next step is really focusing on the negotiation with the lenders. This is going to be the most crucial part of what happens over the next few weeks. And together with the lenders working out either a waiver of the breach or figuring out a long-term liquidity plan, which will allow us to generate the proceeds to repay our loans, especially those with short-term maturities coming up as well as funding the REIT for the CapEx investments and the leasing costs we need to do to maintain the capital values in our portfolio. We're working with our sponsor on potential forms of support. The Phipps transaction that we've been speaking about for quite some time now is still on the table, but the sponsor is considering alternative options for support. And again, a lot of that will depend on our negotiation discussions with the lenders. And really, the -- which form of sponsor support we end up going with will depend upon reaching an agreement and an understanding with the lenders, as to what the most effective form of support will be. We are continuing to pursue dispositions, and as I've said before, it's a difficult time to be selling assets in the U.S. And so in order to give us the best chance of executing dispositions to generate liquidity, we will be pursuing a disposition mandate, which would be -- which would require a unitholder approval, but it would really give us the flexibility and the ability to execute these sales transactions and it would essentially be certain parameters that the unitholders would allow us to sell these assets. And again, with the objective of generating proceeds in order to pay down debt and fund CapEx. And lastly, our strategic review is still active. We're still working with Citi and are actively engaged with multiple parties right now. As we announced in the first quarter -- or in the second quarter, sorry, the -- Mirae transaction, the exclusivity period with Mirae did lapse, but we are actively engaged with several parties. And we're also encouraged by the fact that they're looking at different angles of being able to work with us, ranging from asset sales to strategic capital injection into the REITs and also groups that are still interested in a potential transaction around the REIT platform. And so we're going to continue those discussions and see if there's a way to bring capital into the REIT through that process as well. So I will go ahead and stop my presentation there. We do have some questions at the end of some FAQs in the slides that have -- that we've received from investors, but we're also obviously open to answer any of the questions you might have now. So I will -- I'll leave it to everybody for their questions now.

Thank you, Tripp. Before we kick off the Q&A session, let me run through some housekeeping. We will be taking questions from the analysts and media joining us via MS Teams first. So please use the [ reset ] function if you like to ask a question. Allow me to call out your name first before you unmute. Do state your name and organization and also limit yourself to just 2 to 3 questions first, so that we can let everyone have a chance to ask. For the participants joining us via the live stream, please feel free to type your questions in the chat box, and I can ask them on your behalf. So let's go ahead. I think I see Rachel. Rachel, go ahead, please?

Can you hear me? Okay. Great. Yes. So maybe just to kick start a few questions, so thanks for the update. I'm just wondering on sponsors stance, are they still in favor of potential debt restructuring versus the sale of Phipps Tower?

Yes. So as I mentioned, that the Phipps Tower transaction is still on the table. And the sponsor, as I said before, is considering other potential alternative options. I think that we're still in early stages of the negotiations with the lenders and a lot of the decision about which alternative sponsor support to go with will depend upon the outcome of that. I don't know if the sponsor is leading one way or another. I think it's largely dependent upon coming to an agreement with the lenders on which form they think is probably best.

Got it. And then my next question is really on ICR. What happens if the ICR drops to below 2.5x. So I remember you've said that your financial covenants is actually based on MAS gearing, right, MAS regulatory limits. So if, let's say, your ICR drops to 2.5x, is that considered a second breach? And what happens after that?

So the 2.5x is the MAS and what would happen is the MAS limitation. And what would happen is, our gearing limit from an MAS perspective would lower to 45%. The ICR covenants in our loan documents is [ 2.0x ] and so it's not lined up. Robert, that's correct, right?

Yes. That's correct. So maybe just to supplement what Tripp has mentioned, so the average gearing limit is you get a 50% ceiling if your ICR coverage is 2.5x. So if your ICR could fall below 2.5x. Currently in the mid-year, we're about 2.6x, so slightly -- well, slight below that. All that means is the ceiling will drop from 50% to 45%. We're already above 50% anyway. And that is basically a result of [ devalue ], then is not considered a breach under the financial covenants. Then there's a bank ICR, which is 2x, not with reference to the 2.5x. They were just below 2x that is a breach of the covenants. We are at 3.1x in the moment. So not going to be issue. But what we have issue now is the unencumbered gearing ratio of 60%. Therefore, that is basically total borrowings net of some [ derivatives ] that we have over the investment property. So the denominator is smaller than the total asset concept under MAS aggregate gearing limit calculations. It doesn't have the buffer of cash balances and trade receivable loans.

Okay. So let me get that correct. So if, let's say, your ICR drops to below 2.5, you are still not consider any [ S breach ] because it's asset valuation decline, okay?

Right.

And the loan covenant ICR ratio is calculated differently and hence, you are at 3.1x, and then the covenant is at 2x. Is that right?

Yes. So in short, the aggregate leverage under the MAS calculation is a muted point under the bank covenants. ICR is at -- an unencumbered gearing ratio is.

Okay. Got it. Yes. Right. And just one last question. I think we did see some decline in portfolio occupancy. So in this first half of the year's portfolio occupancy, that has taken into account William Carter's downsizing, right? But I do see some sizable portfolio decline? And if I'm not wrong, it's Michelson as well. So could you really give us some color, Michelson and Plaza, where did the occupancy dropping from. Was it one of your top 10 tenants, yes?

Yes. The -- no, we did not lose one of our top 10 tenants in the second quarter, but we did lose a tenant at Michelson, that actually may have occurred during the first quarter, if I'm not mistaken. So that was already reflected in the numbers. But we did lose a, I think, about a 12,000 square foot tenant at 500 Plaza, and we lost about a 16,000 square foot tenant at Diablo, which was offset a little bit by a new tenant that we signed for about 9,000 square feet. They were the primary drivers of the further occupancy decline over the course of 2Q. So no major vacates during the second quarter. And if you remember, the largest driver of occupancy decline year-to-date is the restructuring of the William Carter's lease at Phipps.

Okay. Got it. All right. I'll pass on the floor to others to ask questions.

Thank you, Rachel. Next, we have Jovi from The Edge. Jovi, please go ahead.

Jovi Ho for The Edge. So yes, I have a few questions. My first one, let me just -- I refer to the flex by JLL announcement from last September. So the first phase at Plaza was expected to be completed in April, right? So do you have an update on that, please? And also, I think does WeWork's ongoing pressure influence our conviction for this, how would WeWork's losses affect the market sentiment towards this flexible co-working space. That's my first question.

Yes. Pat, do you want to take that?

Sure. Yes. Yes. So Flex is a very interesting situation at the moment. We continue to be engaged and have a great relationship with Flex by JLL. And we have to say that they've been a very understanding partner. And the reason I say that is because as alluded by Tripp in his opening remarks, the Children's Place at 500 Plaza, as we've notified you all in the broader market has given us a termination notice, and that has opened up the possibility for us to engage with a large tenant, who's thinking about occupying space at 500 Plaza. This is definitely not a done deal, but we're in negotiations at the moment. And if this tenant is to occupy space at 500 Plaza, it will surpass the amount of square footage that the Children's Place is currently giving up and would likely result us in reshuffling, where we put Flex by JLL in the building at 500 Plaza. So my reason for saying that they've been a very patient partner with us is that they understand the situation is a net positive for the REIT and the unitholders and for the building. And so they're going to wait to see how this negotiation plays out. And if we're successful, we'll move them elsewhere in the building, and it'll just slow down the timeline. If for some reason, we're not successful, which is always a possibility, then we'll sort of pick up, where we left off and we'll keep plugging away on the Flex by JLL partnership. But it's -- I think that the bigger deal that we're referencing certainly takes precedent at the moment because it would be a very large transaction and very important. So that's where we are with Flex. And then in terms of our views on WeWork or co-working, I think the recent WeWork news is largely -- largely a result of their legacy problems, as a result of current co-working headlines or systemic issues in the co-working sector. And I would just preface that with a few things. One is, if you look at our current co-working exposure, WeWork is our largest tenant at about 47,000 square feet and sort of the co-working Flex type space. And our total exposure in terms of in-place occupancy is about 2%. So it's a very small -- and 1% of that is WeWork. So it's -- we have very small exposure to it. That's one. And then the second thing, I would say is if you go back and you look at WeWork's recent financial announcement, obviously, the headlines are going concern risk, which is a material, but their revenues increased, I think, 7% year-over-year. And so that's a sign of tenant demand. I think what WeWork is actually going through is more a result of a legacy operating model that they're really struggling to get out from underneath and that operating model was let's go sign 10-, 15-, 20-year leases at the top of the market and have short-term assets to fund those long-term liabilities. So it's a classic asset liability mismatch that we've seen time and time again in financial history, that being an issue. And so I think what WeWork struggles are more a result of that legacy operating model. And so my takeaway is that there continues to be tenant demand, which is reflected by WeWork's revenue increases year-over-year. And the new model is not heard Flex by JLL or another partner to sign a 15- or 20-year lease with fixed obligations, but instead to enter into a partnership type arrangement like we've announced, where landlords, and the Flex operator working hand in hand, there's profit sharing, and there's more of an upside, and it's a more manageable and [ palable ] situation. So we think that's the future. We're still excited about it. We still see the demand is there. And we will continue to move forward with Flex by JLL. It's just delayed, as part of this larger transaction. So I [ spin off ] a lot there for you, apologies, but I'm happy to jump back in if there's anything that you want to -- me to sort of touch on a little bit more, but I thought it was important context.

Sure. So can I just confirm? I know that WeWork is a small percentage of a tenant mix, but who is building [ as WeWork ] currently a [ tenant there ]?

400 Capitol.

Okay. Got it. All right. So -- and my second question here is just staying on that. So you also announced Peachtree will embark on [ authorization ] last year, and the works are supposed to begin in the first half of this year. So do you have an update on that because there was also an expected cost of, I think USD 18 million announced back then. So does that still hold today? And has that amount already been spent?

That amount has not been fully spent, but we're -- the project is underway, and we're continuing to plan and look to implement that project. And our timeline remains plus or minus Jan 1, 2025, maybe a little bit before, maybe it ekes into 2025. But we're full on with that. The bulk of the money will be spent, as the hard costs really start to take hold, which is swinging hammers and demolishing and constructing things. So we have not spent the $18 million, but the project is underway.

All right. So -- sorry, just a few more questions here. So I think on Phipps Tower, right, I know the sponsor is still [ deliberating ] and considering alternative forms of support. So what are some of these alternative methods in your view? And have they shared the timeline so far?

Yes. Jovi, we can't really speak to all the forms of potential support that they're looking at aside from the Phipps transaction. Again, a lot of it's going to be dependent upon negotiation with the lenders. I think the sponsor is trying to be flexible in how they offer support. And so there isn't one specific form of alternative support outside of the Phipps transaction. And in terms of the timeline, it really, again, just depends on how these negotiations go with the lenders. We are actively engaged with the lenders right now, talking to them every day. And obviously, we're all trying to come to some sort of agreement on how to move forward as soon as possible. So I do think that everybody is working really hard to try to get clarity on this, so that we can really begin executing the plan. But we really won't be able to share details about it until we come to an agreement with the lenders.

All right. Sorry, just the last question for me. So I refer to, I think Diablo, the only Class B asset in your portfolio right now because you already divested Tanasbourne. So compared to end 2022, Diablo's WALE, occupancy have both fallen as well as its valuation. So considering that this was acquired most recently along with Tanasbourne and Park Place, would you consider divesting the above, as it is currently your smallest asset valuation?

Yes. We're taking a look at the portfolio now to determine, which assets we think are going to be the optimal candidates for disposition. And really what we're -- it's part of a larger asset plan that we're putting together to really decide, which assets we feel are going to have the best long-term potential for capital appreciation and which assets we think are going to be the best targets for investment. We've talked several times about the Peachtree AEI and how we expect rental uplifts and valuation uplift from that investment. There are other properties in our portfolio that may not have such a clearer -- such a clear path to, to having increased values from investment that you put into the asset. Diablo is one of the assets. Again, you've noted that it is a Class B asset, and we have had a decrease in occupancy in that building. At the same time, the Phoenix, Arizona market has been relatively strong. As I mentioned before in our slides, it's the submarket or the market that saw the lowest overall percentage declines in valuation. And so I think that we're going to take all those things into account when we're looking at which assets to dispose of and Diablo will be included in that analysis.

Thanks, Jovi. Next, we have [ Jonathan ] from UOB. [ Jonathan ], please go ahead.

I have 2 questions. Firstly, will you be able to resume normal distribution of DPU in the second half? And under what sort of circumstances can you start paying distribution? So that's the first question. And then second question relates to the waiver -- getting the waiver from the banks on the breach of the covenant. Do you have a time frame when that can be setted -- like is there some scheduled meeting with the bankers, where the bankers sit down to discuss this issue. I would presume that some banks may want to reserve their [ lives ]. So if that is the case, is there a risk that you can't get this with a like almost indefinitely?

Robert, do you want to take the first shot at that and...

Yes. Sure. So like Tripp has mentioned earlier, we still are having the ongoing discussions with the lenders on the -- predominantly on the [indiscernible] plans how we're able to release more liquidity to address the debt level, maybe also including an equity-raising exercise to bring down the debt level to address the gearing issues. We are progressively talking with the various lenders, the major ones, including all vendors discussions. There isn't a defined timeline. But you're right, legally, the bank has the right to call for the loan, but we have no indications from our discussion with the lenders at the moment. We obviously want to resolve this ASAP, so that we can go back to normality in the second half is predicated on the successful negotiation with the lenders as well as making sure that we have the liquidity to address all our current obligations going forward.

Like, so meaning that some form of restructuring has to be completed and before the bank agree and then before you can resume paying dividend.

For lift on waiver, yes, there should be some kind of resolution to the banks on how we can execute our plan and reduce the debt to a certain level. Otherwise, it may be a situation, where we may have a standstill moment with the banks, that means, they are not going to activate anything, but wait for us to work through our plans to release capital to address the debt level. So while this is still in the works, yes, distribution will be a bit more limited.

Okay. So the banks will look at your -- some improvement in your capital structure before they agree to a waiver?

Yes. So waiver, what that means is well, it's basically restoring the borrowers back to its original positions, who change that the banks will have no further rights from that point unless something else happen down the road. So while our step-up at the [ elevated ] positions is subject to negotiation with banks [indiscernible].

Okay. And as a follow-up, this -- getting this disposition mandate from shareholders. Could you share with us the time frame when you can get that mandate, meaning mid of this year because that approval affects your -- the speed, whereby you can do your divestment?

Yes. That's right, Jon. And so I think that the divestment mandates would be, hopefully, packaged together in an AGM with whatever form of sponsor support that we've discussed, whether it's transaction of Phipps or another method of sponsor support. And the idea would be to come to that AGM with kind of a package of items that we would want to be able to execute in order to resolve the situation that we're in now. And so you're right, the divestment mandate would be extremely helpful in helping us launch these dispositions and get them underway, and it's something that we're really working hard on right now. Part of the challenge for us is that there haven't really been -- there hasn't been a divestment mandate like this before from an S-REIT, and so we're kind of in uncharted territory in how to navigate that through an AGM, but we're working on that. And again, using that disposition mandate, as one of the steps in a more holistic plan of how to put something in front of the unitholders for approval on how to resolve the situation that we're in.

So this valuation mandate will come with sponsors [ part ]?

That's the idea right now, yes.

Thanks, [ Jon ]. [ Jute ] from Business Times. [ Jute ], Please go ahead.

Good to see you again. I understand that there are some representative from the sponsor was to be present at this briefing due to overwhelming requests, unfortunately, it appears he has withdrawn at the last minute. Can we have -- what was the reason for this no show? And is the sponsors' reps absence today any indication of the level of sponsor support that the REIT manager expects to receive. I mean, I know Tripp, you have mentioned at previous briefings that the sponsor and REIT manager are in the trenches together. Would you still say this is true today? And a related question to that, what can unitholders really expect the sponsor to do in the immediate term to help the REIT pull through this challenging period as well as in the medium and long term?

Yes. Thank you, [ Jute ]. I can't comment on why a sponsor's rep is not here in the briefing today. I apologize that I can't comment on that. And I've said in the past that they have been in the trenches with us, they are part of the lender negotiations with us. Obviously, the sponsor is the asset manager of our assets as well. And so they've been working with us very, very closely on putting together the property-level asset plans. And so the sponsor continues to be engaged with us and trying to find a solution to what we're doing to get ourselves through the situation that we're in right now. But again, I apologize, I can't really comment or give any clarity in to what's happened today here for the meeting. And in terms of your other question about the long-term -- the longer-term objectives or the sponsors' [indiscernible] here, I also can't really comment on that. I would need to have the sponsor comment on that directly.

[ Jute ], does that answer your question? Thanks, [ Jute ]. Next, we have Derek from DBS. Derek?

Can you hear me?

Yes, we can hear you.

I just wanted to ask just 2 questions. Firstly, I know you are -- the going negotiations with the various bankers, right, on the waiver. I'm just wondering whether is there a timeline that we should be aware of, i.e. like that they are willing to give because the breach can be ongoing for a longer time. So is there a point that we should be taking note that the bankers will require an alternative action?

Yes. Derek, right now, there is not a specific date for any kind of cure or remedy that's required either from a regulatory standpoint or from the bank standpoint. We obviously are not comfortable with the situation that we're in right now. And we're not going to -- just going to take our time and trying to find a solution to this. Look, we're actively engaged, literally speaking to the banks every single day. And we are in the process of putting together the next all lenders meeting, and hopefully, we'll have that in the coming week or 2. But really, it just depends on how the negotiations go and how the discussions go on a case-by-case basis. To your point, the breach it can't go on forever. We're obviously looking at year end, wanting to be able to have clarity on this before year end when we have to issue our financials at year end. And I think that everybody is kind of working toward a goal of getting this done as soon as possible. But there is no hard deadline for when this has to be resolved. I think that the options for us, obviously, would be the best outcome would be for -- to have a solution agreed with the lenders to where we get a waiver, and they waive the breaches, which would kind of put us back into normal operating territory. But in absence of getting a waiver, and I think to Jon's earlier point, that the banks may want to hold on to some of their remedies. The next option obviously would be some sort of standstill to where the banks agree that even though we're over the lines, they won't take any action or enforce anything, and that would functionally allow us to operate in a lot of the ways that we think that we need to, to protect capital values and maximize the value of the portfolio. So I think there's a range of different outcomes here. But everybody is focused on this. This is the top priority right now for everybody. We have to get clarity on this before we can have clarity on anything else strategically. And so I think that it's going to remain the top priority until we come to a conclusion on it.

Got it. Tripp, my next question is on the disposition mandate. I understand that we probably need to be realizing or selling some assets to bring the gearing down, but at the same time, you also under through the strategic review and having discussions with existing or potential partners, right? Would this 2 strategy run contrary to each other, i.e., what it means is that you limit your own potential outcomes by virtual affair, I will assume that the strategy partner will want a certain level of portfolio comfort and you're asking to sell assets. So how should we think about this going forward, which is the one that you're really pursuing?

Yes. Derek, that's a great question. And you're right, it is -- there is complexity involved here, not only because the market for asset sales in the U.S. is really, really challenged right now and difficult, and we are going to need that disposition mandate to give us the flexibility, but we also have other constituents that we're having to discuss things with now. Not only are we looking at strategic partners that may have an interest in keeping high-quality assets in the portfolio, but we also have to work with the banks to determine, which assets we want to keep, which assets, we want to sell. And so there are a lot of chefs in the kitchen at the moment. We're having to take into account a lot of different potential interests and potential different outcomes. And so to your point, it is a complex analysis right now. I think that one of the things that we have been able to get some clarity on, at least, is where everybody's interest seem to be aligned is in trying to protect as much of the capital value in the portfolio, as we can and maximize the value of the portfolio. And what that means is that really taking a look at the assets to where we can make investments and see a return on those investments. And then, also on the other end of the spectrum, taking a look at the assets that we think are going to have challenges for a longer period of time and perhaps not focusing our investment in those assets and maybe putting those up as candidates for disposition in the beginning. But I think it's really about maximizing portfolio value at this point. The other side of that is that, obviously, in a market like this, your highest quality assets are the easiest to sell as well. And so I think that we're going to have to balance all these things together, the reality of the market conditions on the ground, focused with our long-term objectives and aligning those longer-term objectives with the different constituents, but our top priority is going to be maintaining as much of the value of the portfolio as we can. We think that's in the best interest of the unitholders, and that's going to be our primary focus. But your point is well taken. It's complex in trying to line all these things up, and we're going to continue to do our best to try and do that.

Thank you very much. I don't see any more -- okay. Maybe just take another question from Vijay Natarajan. Vijay, go ahead.

I just have one technical question. Is the lack of distribution, would it have an impact on the tax structure in terms of -- as a REIT, you have to distribute 90% of the income. What would this have an impact on the tax structure, if you have not distributed income by the end of the year?

Yes, Robert?

Yes, Vijay, thanks for the questions. I mean, you're right about the [ trustees ], the requirement to distribute 90% of the annual distributable income. So it hasn't presented immediate issue at the moment on the tax fronts or from trustee standpoint, right, trustee standpoint. So we're looking through the -- this matter with our U.S. and Singapore tax counsel. So in the event that let's say, we cannot make a full year distribution that might be yes, the issue has to be resolved. We need to be able to quantify if there's any tax leakages and what would that be? And structurally, how we go about releasing the distributable income for internal utilization. So there's a lot of things that we need to sort through both on the U.S. tax front as well as the arrangement that we have with IRS on the use of this amount is [ earning right now ].

So if my understanding is correct, would this just mean an additional tax leakage or would there be a breakage in the structure, say, for example, if you're not able to distribute by the end of the year, I mean, will the tax structure collapse, and you might not be able to have the restructure in the U.S. and Singapore moving forward?

Yes. Vijay, we're assessing both of that. I think likelihood is more of tax leakages than the collapse of the entire structure. But is -- they are too premature to comment any further at this moment.

Thanks, Vijay. Rachel, would you like to ask your next question. Rachel?

Just a few follow-up questions. I think firstly, for the Phipps sale. Can I just understand if there's any other administrative steps that you need to take aside from just the [ EGM ] and approval from the unitholders?

Yes. Rachel, the next steps, I mean, we're -- we've done most of the work in the Phipps transaction already. The remaining steps would be, well, the sponsor has completed their due diligence. We do have all the internal approvals and things set up that we need. The next step would be to sign a purchase and sale agreement with the sponsor. And then once we have that purchase and sale agreement, put that to the unitholders for a vote in [ AGM ]. those are the only real steps that are left. It is -- we've executed most of the steps already. And so we have clarity into the price of the asset. We completed the appraisals. Most of the work is already done. So it would just be essentially the [ AGM ].

Okay. Got it. And the next question is now that the lenders are in the picture, do they have a say in terms of what options you take moving forward? And how much of a -- how much of [ way ] in terms of them being able to influence what options you take after this year?

Yes. I mean, to be candid, the lenders do hold a lot of influence right now. Our objective as the management team is always to look after what's in the best interest of the REIT and our unitholders, and so that's the perspective that we're taking. But the lenders do have a lot of leverage at the moment because we -- because of the breach of the loan covenants, they do hold a lot of the cards. And so I do think that it's going to be important for us, even though, we're -- our primary objective is always to keep our unitholders' interest in mind, trying to figure out how we can best align that with the bank's interests. Ultimately, there are some shots that the banks can call here. But I think that the best outcome for us is going to be having this negotiation and finding ways, where we can align those interests, as best we can. I don't know if that really answers your question. But yes, it's going to be an interactive process. Obviously, in the disposition of assets, I think that the banks and our unitholders want to see us maintain as much of the value in the portfolio as possible. So I think that we're aligned there. And I think that in terms of sponsor support options, getting the most flexible structure is possible and the most proceeds [ impossible ] with the highest execution certainty are going to be places, where our interests are aligned as well. So in all those things, I think that there's a lot of places for us and the lenders to come together on. So we'll just have to see how those discussions go.

Okay. Got it. Maybe just one last question from me. Just following on from Vijay's question. If it's the scenario is just a tax leakage. Could you give us a sense what's the potential tax rate that you have to pay?

Rachel, not at this moment. I'm still waiting for some feedback from the U.S. tax counsel.

Thanks, Rachel. I think we can take last questions from Jovi. Jovi, please go ahead.

Sorry. Just 2 more questions from me. Thanks for answering the questions so far. So could you just provide more color on the Phoenix submarket, please? Because I think from a slide [indiscernible], I know that a vacancy in those 2 submarkets, it's around the median, but the rent growth is much higher. Just a bit on the figures answer you [indiscernible].

Sorry, Jovi, I missed -- I think I missed some of that.

So on the submarket of Phoenix.

On the submarket of Phoenix. Okay. Pat, can you just speak to Phoenix?

Yes. Sure. So listen, I would say the Phoenix, it's a [indiscernible], yes. remember like the pivot into Phoenix was twofold. One is Sunbelt sort of growth-oriented market, complementary fit to the balance of the portfolio; and then the second aspect of it was one asset being a newer asset, Park Place, modern vintage fully leased credit tenants, limited CapEx, and the other asset being -- came up earlier, I forget, who asked the question, sort of being Class B. And yes, it's Class B, but it's also sort of flex -- flex-type product in nature, and I don't mean co-working type flex. I mean sort of light industrial/office type flex product. And that's reflected by the lease that we got done with On Semi, a semiconductor lab manufacturer, who's located in Phoenix and took nearly 30,000 square feet at Diablo earlier this year or maybe was late last year. So with that context in mind, I would say that Phoenix continues to be a high population growth market, and we continue to see tenant demand there. And there has been an increase in sublease activity across the Phoenix market, but not really -- especially at Diablo, like the sort of sublease space that's come on the market is more traditional Phoenix CBD type office space that we're seeing growth in sublease. And that space really doesn't jive with what Diablo offers to the market for reasons that I've highlighted in terms of being a little bit more light industrial sort of -- light industrial/office type space. And so we continue to see growth there. It is getting a cyclical point, where there's been some softness in terms of subleasing activity that's put a little bit of downward pressure on headline rent growth in the real top end of the market. But for the type of product that we have, we think we'll ride that out because Park Place is fully leased and the credit tenants for the next 6 years, 7 years. And so there's no leasing risk that we face there and then Diablo is just sort of different type product. So we like the Phoenix market in our portfolio, and we like the product that we have for its modern vintage, low CapEx needs or it sort of flex-oriented type product that isn't really traditional office use. So I don't know if that answers the question, but it continues to be a growth market, but it's going through a little bit of a cyclical lull at the moment for broader Phoenix is what I would say.

So just my last question here. So what is the impact of Sabana REIT [ EGM vote ] last week on S-REIT, particularly those with overseas assets in your view? So how does that move influence Manulife's current situation, if any?

Yes. Carol?

That's an interesting question. I think first of all -- first of all, I think for all those, who are curious, [ Class ] is not our shareholder, and he remain not our shareholder from the last [ recheck ] a couple of weeks ago. And I think what has happened to Sabana over the many years has been interesting, has set a new stage for the S-REIT. But I guess for -- I mean, I can't comment, I mean, we have been thriving on the external REIT model for the last 3 years. To change it overnight, I mean, from personally my perspective, that's going to be a big challenge, right? I mean there are key players that have involved and how that is going to evolve is anyone's guess. But for some of the offshore REITs, I think it really depends on what their objective is. And I mean, without the -- I mean, without the true story and ability to comment on the rest, I think for us, we are in a little bit different position from Sabana. I mean, our issue has been valuation problem that's caused the gearing problem, that's caused to a breach, where we are today being internalized or not will not solve our problem that is right in front of us today. So that's what I want to just remind everyone. I mean, it's a bit different, but it has been an interesting story to follow, and we follow it very closely. So let's see what that means for the S-REIT, and I think it depends on how the other REITs will follow through in terms of what unitholders want, I think that would be a key story. But I think you need to have quite a substantial unitholding to be able to influence a result of that nature. Yes.

Thanks, Jovi. We are at the hour mark now, so I'm afraid we have to end here. Apologies, we may not have had time to respond to some of the questions that we have received online, but just give us a bit of time, and we'll get back to you via e-mail, okay? So yes, we'll end here. Thank you very much for attending today's briefing. Yes, have a good week ahead. Thank you so much.

Thank you.

Thanks, everybody.

Thank you.

Yes. Thank you.