Manulife US REIT is whittling its debt levels that are too high based on the securities regulations in its home country with the sale of the tallest office building in downtown Sacramento, California, a property that's one of the real estate investment trust's better-performing assets.
The Singapore-based REIT intends to repay fully its pending debt maturities of $130.7 million through 2025 with the $117 million sale — now under contract — of 400 Capitol Mall, according to filings with the Singapore Stock Exchange. The paydown will drop the REIT’s debt leverage from 56.3% to 54.2%. That level still exceeds standards set for REITs in Singapore that the ratio should be less than 50%.
"We have taken a first major step towards the ‘recovery’ phase of our strategic roadmap,” John Casasante, CEO and chief investment officer of Manulife US REIT, said in a statement. “Despite the ongoing challenges in U.S. office market and the lack of debt availability that continues to hamper transactions, we were able to secure the sale of Capitol to an all-cash buyer, which provides us with the liquidity and flexibility to make an early repayment of the 2025 debt maturities and mitigate risks amid an uncertain environment.”
400 Capitol Mall is a 501,308-square-foot, 29-story office building. The divestment will allow Manulife US REIT to use the capital that would otherwise be committed to maintain the Class A property to drive leasing activity and strengthen the quality of the other assets it plans to hold, the company said.
This is in line with the REIT’s portfolio optimization strategy to support long-term sustainable risk-adjusted cash flows and returns.
The sale price of $117 million, or about $233 per square foot, was negotiated considering an independent valuation of $118 million as of September, according to the filing.
"400 Capitol Mall is one of the premier office buildings in Sacramento and has performed well despite the hardship the office market has faced in recent years,” said Will Austin, CoStar Group's director of market analytics for Sacramento. “At the time of sale, the property was more than 90% leased, one the strongest figures among the submarket's investment assets.”
Wave of sales
The deal would be the latest in a string of downtown Sacramento property sales, according to Austin. Earlier in September, 770 L St. was purchased for $132 per square foot, a 40% discount compared to the sale of 400 Capitol Mall, just three blocks away.
“Ongoing buyer demand for downtown office buildings is a good sign for the market's viability,” Austin said. “Large office properties in nearby markets like San Francisco or Oakland have been returned to the lender outright, likely resulting in a longer and slower recovery."
The disposition of 400 Capitol would follow Manulife US REIT's $100 million sale last December of its best-performing property, its two-building, 274,700-square-foot Park Place in Chandler, Arizona. Manulife US REIT sold that complex to John Hancock Life Insurance Co., a subsidiary of the REIT’s sponsor, Canada-based Manulife Financial Corp.
The sale of 400 Capitol is to an unrelated entity this time, according to the filing.
Manulife US REIT identified the buyer as 400 CM Owner LLC. That limited liability corporation is registered at the same address as Buzz Oates Real Estate, one of Sacramento's largest privately held investment management companies.
Larry Allbaugh, CEO of Buzz Oates, did not immediately respond to CoStar News' request for confirmation.