Prime US REIT: Navigating through headwinds
- FY22 DPU -3% y-o-y to 6.55 UScts, slightly below, due to higher interest cost and one-off termination fee in FY21
- Key positives: i) Portfolio occupancy relatively stable; ii) strong reversions from 2 tenants who signed long lease; iii) interest rates are significantly hedged until mid-2024
- Datapoints to watch: i) Gearing rose to 42% due to 7% drop in portfolio valuation; ii) higher operating costs
- Maintain BUY; lower TP to US$0.63
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- FY22 DPU -3.4% y-o-y to 6.55 UScts, slightly below our estimates, largely due to higher interest costs (+27% y-o-y) and absence of one-off termination fee income received in 2H21, partially offset by full-year contributions from the acquisition of two assets in Jul 21.
- 4Q22 estimated DPU -19% y-o-y to 1.40 UScts, mainly due to higher interest costs, lower occupancy, and a one-off termination fee income largely recorded in 4Q21.
- 4Q22 revenue and NPI was flat q-o-q and -5% q-o-q, respectively. The lower NPI was due to higher operating costs as tenants returned to office.
- Gearing increased by 3.4ppt to 42.1% from 38.7% in 3Q22, largely due to the decline in portfolio valuation (-6.6% y-o-y).
- Effective interest rates inched up q-o-q to 3.4% from 3.1% in 3Q22. All-in average cost of debt inched up marginally q-o-q to 3.3% from 3.2% in 3Q22.
- Hedging ratio is at 82%, vs. 83% as at 3Q22, with fixed rates (hedged/fixed) expiring during mid-2024 to 2029 (65% is hedged/fixed from 2025 to 2026).
- Refinancing risks are largely mitigated, as debt facilities have one to two years of extensions. As such, the next refinancing requirement (67% of total debt) will be in 2024.
Portfolio occupancy relatively stable q-o-q at 89.1% but saw larger decline at Promenade I&II (-13ppt); recorded strong 4Q22 reversions of c.20% mainly due to 2 tenants at Crosspoint that renewed/signed long leases at >25% reversions
- Portfolio occupancy held relatively stable at 89.1%. The larger movements in occupancy were mainly from Promenade I&II (-13.4ppt q-o-q to 85.2%) and Tower 909 (+3.5ppt to 88.2%).
- Leasing activities have slowed in 4Q22. PRIME signed 143k sqft of leases in 4Q22 (-42% q-o-q), mainly led by the new lease at Tower 1 at Emeryville in 3Q22 (high base). 4Q22 leasing activities were mainly led by tenants from scientific R&D services, finance, biotechnology, manufacturing, and legal services. Despite the slowdown in 4Q22, 2Q22 was the slowest quarter for the year, with only 86k sqft of leases completed.
- Strong positive rental reversions of 20%, mainly from Crosspoint. In 4Q22, PRIME recorded very high positive reversions of 20.2%, substantially from two tenants from Crosspoint, which saw i) an existing tenant downsize from 84k sqft to 57.5k sqft but extend the lease to 2032, ii) a new tenant backfilled space and signed a lease till 2034. Both leases saw reversion of >25%.
- Management continues to expect positive rental reversions in 2023. One of the top 10 tenants (c.5% of CRI) with its lease expiring at the end of this year has been rumoured to be looking at other buildings. PRIME will be focused on engaging the tenant for the lease.
- Passing rents are 6.3% (vs. 6.7% in 3Q22) below that of market rents. Most assets are under-rented, except Reston Square and One Washingtonian Centre.
- Portfolio valuation declined by 6.7% y-o-y with weighted average cap rate expanding by 47bps. PRIME’s portfolio valuation fell by 6.7% y-o-y and cap rates expanded between 25bps to 75bps. Larger properties that saw a larger decline were 222 Main (-9.5%; cap rates expanded 50bps), Village Centre Station II (-8.1%; 50bps – possibly due to lower occupancy), Park Tower (-6.9%; 25bps), and 171 17th Street (-4.8%; 50bps).
- Majority of PRIME’s assets have physical occupancy above 50%. Overall physical occupancy in the US office market has improved, surpassing 50% for the first time since the start of the pandemic, albeit uneven across markets. Physical occupancy at PRIME’s assets ranges between 25% to as high as mid-80%. Majority of the assets are above 50% physical occupancy.
- Retirement of Barbara Cambon, CEO and CIO, from 8 Mar 2023, who will be succeeded by Harmeet Singh Bedi, current Deputy CEO and CFO. Barbara has been the cornerstone of the REIT that has listed PRIME US REIT. We would like to wish Barbara all the best and a happy retirement. Congratulations to Harmeet on his promotion!
Despite the challenging environment, PRIME’s share price is currently trading at below Mar 20 pandemic low, offering FY23F yield of 11% and 0.7x P/NAV. At these levels, we believe the headwinds are largely priced in and it is at an interesting level to monitor for any potential short-term inflection in macroeconomic sentiment/outlook, especially when Fed rate hikes have started to taper.
FY Dec | 2H2021 | 1H2022 | 2H2022 | % chg yoy | % chg hoh |
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Gross revenue | 84.7 | 81.8 | 81.2 | (4.1) | (0.7) |
Property expenses | (30.3) | (31.0) | (34.1) | 12.5 | 10.0 |
Net Property Income | 54.4 | 50.8 | 47.1 | (13.3) | (7.3) |
Other Operating expenses | (5.2) | (5.5) | (5.2) | (1.2) | (6.4) |
Other Non Opg (Exp)/Inc | 7.64 | 26.4 | 10.8 | 42.0 | (59.0) |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | - | - |
Net Interest (Exp)/Inc | (9.5) | (10.1) | (11.5) | (21.6) | (13.8) |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | - | - |
Net Income | 47.3 | 61.6 | 41.3 | (12.7) | (33.0) |
Tax | (0.8) | (4.5) | 18.3 | (2,439.2) | (512.2) |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 46.5 | 57.2 | 59.6 | 28.2 | 4.3 |
Total Return | 29.3 | 57.2 | (84.1) | nm | (247.1) |
Non-tax deductible Items | 10.8 | (15.9) | 120 | 1,006.3 | (856.3) |
Net Inc available for Dist. | 40.2 | 41.3 | 35.8 | (10.8) | (13.3) |
Ratio (%) |
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Net Prop Inc Margin | 64.2 | 62.1 | 58.0 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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