Prime US REIT: Different, yet the same
- 2H23 DPU was 0.25 UScts; announces 1 for 10 bonus issue, DPU will drop on a bigger share base, all else constant
- Noted good leasing momentum in 4Q23; decline in asset value by <10% is better-than-expected
- Watching for refinancing of expiring debt in FY24 and how its deleveraging target of US$100m pans out
- Maintain FULLY VALUED; TP of US$0.07
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- PRIME declared 2H23 DPU of 0.25 UScts (10% of DI) vs 3.03 UScts in 2H22, owing to capital preservation needs.
- In addition, it has declared a bonus share issue of 1 for 10 which translates to 1.03 UScts (based on last traded share price on 20 Feb 2024). While management highlighted that shareholder will receive c.3.74 UScts (incl bonus issue) in FY23 , the effect of the bonus issue will result in a lower share price / potential future DPU once it goes ex-entitlement, all else constant.
- FY23 DI fell 18%, in line with our estimates, largely due to PRIME raising management fees paid in cash from 20% to 100% and higher interest cost. 4Q23 DI fell 6% q-o-q to US$13.9m.
- 4Q23 revenue fell 1.2% y-o-y (-0.3% q-o-q) but NPI increased 0.3% y-o-y (-1.7% q-o-q).
- Gearing increased to 48.4% from 43.7% in 3Q23 as portfolio valuation declined by 9% y-o-y. Average cost of debt stayed flat q-o-q at 4%.
- The drop in valuation was in fact lower-than-expected. The latest portfolio valuation saw an average cap rate expansion of 54bps. Cap rate expansion ranged from 0bps to 100bps, except for 101 South Hanley and Promenade I&II, which saw cap rate compression of 75bps and 50bps respectively. Assets with the largest decline in valuation were One Washingtonian (-36% y-o-y), Sorrento Towers (-16%) and 222 Main (-11% y-o-y).
Portfolio saw good leasing momentum in 4Q23 but expect portfolio occupancy to decline following Sodexo’s vacate.
- Operationally, PRIME reported a relatively stable quarter with some pick-up in leasing momentum.
- Portfolio occupancy improved marginally to 85.4% from 85% in 3Q23, held up by higher occupancies at Tower 909 (+3.7ppt q-o-q to 91.5%) and One Washingtonian Center (+6.1 ppt q-o-q to 86.3%). Park Tower saw a decline of 2.7ppts q-o-q to 72.5%.
- 2024 portfolio occupancy is expected to decline with the departure of one of its top 10 tenants, Sodexo at One Washingtonian.
- In 4Q23, PRIME completed 304ksqft of leases (double that of 3Q23), of which, around half were renewals and half new leases (including expansions).
- 4Q23 rental reversions were +9.6%.
- Prime highlighted there’s good momentum on renewals and backfills for upcoming 2024 lease expiries at Promenade and 101 South Hanley and there are notable leasing discussions underway at One Washingtonian Center and Park Tower albeit with relatively long lead times.
Target to deleverage by US$100m in 2024; all eyes on refinancing of debt expiring in July 2024.
- As part its efforts to be prudent on capital management, PRIME targets to execute up to US$100m of deleveraging in 2024 and is currently holding constructive refinancing discussions with lenders of its US$600m credit facilities (outstanding of US$478m) due in July 2024.
- On its distributions going forward, the Manager will evaluate PRIME’s distribution policy dynamically and periodically. PRIME continues to focus on leasing (both retaining and backfilling its tenants) and adopts a strategy to focus on net effective rents (lower capex deals) wherever possible.
- In addition, management looks for potential deleveraging strategies and remains prudent in the use of capital.
Maintain FULLY VALUED rating; TP of US$0.07. We maintain our FULLY VALUED rating; TP of US$0.07. PRIME has adopted a different capital preservation strategy compared to its peers. While it has not suspended distributions, the cash payout is minute (at 10% payout). All eyes remain on two key major factors i) upcoming refinancing of US$600m credit facilities and ii) efforts to deleverage. Current gearing at 48.4%, though within the regulatory limits of 50% (with ICR of > 2.5x), it is a little too high for comfort. As such, we believe leverage risks remains despite a lower payout.
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