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'Bitter Pill': Manulife REIT To Offload Buckhead Trophy In Bid To Stabilize Portfolio

A Singapore-based real estate investment trust that owns more than 5M SF of U.S. offices is looking to sell off one of its most valuable assets as it looks to reduce its debt obligation.

Phipps Tower in Buckhead, home to the children's clothing maker Carter's.

Manulife US Real Estate Investment Trust is in talks to sell Phipps Tower, a 20-story, glass-clad office building above the high-end Phipps Plaza mall that serves as the headquarters of children’s clothing manufacturer Carter’s. The REIT, which trades on the Singapore Exchange Securities Trading Limited, has agreed to sell the property to its manager, The Manufacturers Life Insurance Co., in a deal that could close by the end of June.

Manulife US REIT disclosed the agreement on May 24 as an update to a strategic review the landlord initiated in November. 

The transaction for the building, which was 94.5% leased to 10 separate tenants at the end of 2022, would be for a price determined by the average of two independent appraisals, the REIT said in the update. Its most recent internal valuation of the tower on Dec. 31 was $210M, while the Fulton County Board of Assessors assessed the tower at $176M last year.

The parent company has agreed to waive the divestment fee on the sale, according to the update. It's the second transaction in which a Manulife subsidiary has agreed to acquire an office building from the REIT it manages.

Earlier this year, Manulife US REIT sold Tanasbourne Commerce Center in Portland, Oregon, for $33.5M to John Hancock Life Insurance Co., which Manulife purchased in 2004. Manulife US REIT had acquired the three-building, 133K SF office park in 2021 for $33.9M, The Registry reported

The sale of Tanasbourne and Phipps demonstrate the parent company's "commitment to the REIT," a Manulife spokesperson said in a statement to Bisnow.

“Proceeds from these divestments will be prioritized towards near-term loan maturities and essential capital expenditures,” Manulife US REIT CEO William Gantt wrote in the update.

Phipps is the fourth-most-valuable asset in Manulife US REIT's portfolio and its second-newest, according to its website. The building is considered to be “one of the gems in the portfolio, which has historically shown resilient cash flows,” DBS Group Research analyst Derek Tan said in a report, according to Singapore publication The Edge.

“While the potential sale of the property with strong attributes could mean that the impact from occupancy challenges faced by [Manulife US REIT]’s other existing properties is amplified, we see this as a potential bitter pill to swallow in order to bring forth more stability for the portfolio,” Tan said in the report. 

Manulife hired Citigroup as an adviser for its strategic review last fall, after which it entered into talks with Korean investment firm Mirae Asset Global Investments, which was eyeing a purchase of Manulife US REIT's shares, Gantt wrote in a March release.

In the update published last week, Gantt wrote that the exclusivity period on those talks had lapsed without a deal.

Mirae’s U.S. REIT, Mirae Asset Maps Frontier US Private Real Estate Trust No. 5, recently posted losses of more than 70% due to value struggles in its portfolio, including a 75% value loss on a Washington, D.C., office building.

Manulife U.S. REIT's efforts to pay down its debt come as the domestic office market sours from spiking interest rates and uncertain corporate demand for office space. As of the first quarter of this year, Manulife U.S. REIT's gearing ratio — the measure of how much of a company’s equity would need to be sold to pay off its debt — was nearing 50%, according to a May report by DBS.

Companies with gearing ratios above 50% could face tougher financial conditions as the economy weakens. Manulife US REIT's spokesperson said that a pro forma gearing ratio will be determined once a purchase price for Phipps is agreed upon.

The gearing ratio was expected to drop to a low 40% level if Mirae were to acquire a majority stake in the REIT, according to the DBS report. 

Manulife US REIT owns more than 5M SF in 11 office buildings across the country, including 1100 Peachtree St. in Atlanta; 3161 Michelson Drive in Irvine, California; 1750 Pennsylvania Ave. NW in Washington, D.C.; and The Exchange in Jersey City, New Jersey.

Most of the REIT’s holdings were developed in the 1980s and 1990s. Phipps Tower, though was developed in 2010 and was one of the series of trophy towers developed during an overbuilding period in Buckhead that the Urban Land Institute described as a “bloodbath.” Manulife developed the tower along with Crescent Resources, which filed for bankruptcy in 2009 and emerged a year later.  

Manulife US REIT will continue to explore other fundraising options, including further asset sales, to reduce its gearing ratio, Gantt wrote in the May 24 update. Gantt was hired as the REIT's CEO last year after 16 years working as a real estate officer for the Washington State Investment Board, according to his LinkedIn profile.