Manulife US REIT: Navigating Turbulence Through Strategic Divestments and Deleveraging

The U.S. office real estate market remains a battleground of contrasts. Prime assets in high-demand submarkets like Midtown Manhattan and Silicon Valley are attracting tenants, while non-prime properties face elevated vacancies and valuation declines. For investors, this bifurcation demands a nuanced understanding of operational resilience and capital discipline—qualities that Manulife US Real Estate Investment Trust (MUST) has been actively cultivating through its Recapitalisation Plan.

Strategic Divestments: A Path to Financial Stability

MUST's 2024-2025 strategic divestments underscore its commitment to deleveraging. The sale of Capitol in Sacramento (US$110 million) and Plaza in Secaucus (US$40 million) generated critical liquidity, enabling the REIT to repay US$130.7 million in 2025-maturing debts and 20% of its 2026 obligations. By June 2025, the REIT aims to fully extinguish the remaining US$163.9 million of 2026 debt. These actions have reduced gross borrowings from US$925.7 million in 2023 to US$745.0 million as of December 2024, despite a temporary rise in aggregate leverage to 60.8%. The management team, led by CEO John Casasante, has prioritized liquidity over short-term yield, recognizing that a stable balance sheet is the bedrock of long-term value creation.

The broader U.S. office market context reinforces this approach. Prime office vacancy rates have dipped to 14.5% in Q2 2025, while non-prime assets languish at higher levels. MUST's focus on divesting lower-performing properties aligns with the sector's “flight to quality,” allowing it to redirect capital toward markets with stronger fundamentals. However, the REIT's portfolio occupancy rate of 68.4% as of June 2025 and a -10% rental reversion highlight the challenges of operating in a sector still grappling with hybrid work trends and supply-demand imbalances.

Distribution Sustainability: A Delicate Balancing Act

MUST's distribution history reveals a pattern of volatility. While semi-annual payouts of up to $0.03 per unit were common in 2020-2022, the REIT suspended distributions in November 2023 under its Recapitalisation Plan. The FY2024 distribution coverage ratio (DCR) of 1.7x—a sharp decline from 2.4x in FY2023—reflects the strain of debt repayments and lower rental income. With IAD at US$38.3 million in FY2024, the REIT lacks the earnings capacity to support distributions without compromising its deleveraging goals.

The suspension of payouts is a pragmatic move, but it raises questions about investor patience. MUST's management has signaled that distributions could resume if “Early Reinstatement Conditions” are met—such as further debt reduction and improved portfolio performance. However, the path to reinstatement hinges on the REIT's ability to execute additional asset sales and stabilize its income streams. For now, unitholders must weigh the trade-off between immediate yield and the long-term benefits of a leaner, more resilient balance sheet.

Market Dynamics and the Road Ahead

The U.S. office sector's recovery remains uneven. While prime assets benefit from renewed demand for amenity-rich spaces, non-prime properties face prolonged pressure. MUST's strategic focus on asset optimization—such as securing above-market leases for 80% of its new contracts—positions it to capitalize on pockets of strength. However, the REIT's exposure to high-vacancy markets like Atlanta (where Peachtree was sold in May 2025) underscores the risks of geographic concentration.

Investors should also monitor the REIT's interest coverage ratio (ICR), which fell to 1.7x in FY2024. While this metric is below the sector average, the one-off US$2.3 million lender fee and ongoing debt repayments suggest a trajectory toward improvement. By June 2025, the full repayment of 2026 debts could provide a catalyst for a stronger ICR and a reassessment of the REIT's credit profile.

Investment Implications

For long-term investors, MUST represents a high-conviction opportunity in a sector undergoing structural change. The REIT's disciplined approach to deleveraging and its alignment with prime office trends position it to outperform peers in a recovery scenario. However, the absence of distributions and the need for further asset sales mean that patience is a prerequisite.

Key risks include the pace of office demand normalization and the potential for over-leveraging in a low-yield environment. That said, the REIT's access to the Sponsor's global real estate platform and its focus on diversification into less capital-intensive assets offer a path to sustainable growth.

In conclusion, Manulife US REIT's strategic divestments and deleveraging efforts are laying the groundwork for a potential rebound. While the road to distribution reinstatement is uncertain, the REIT's operational resilience and alignment with market fundamentals make it a compelling case study in navigating the complexities of the modern office sector. Investors willing to tolerate short-term volatility may find value in this disciplined, forward-looking approach.