Prime US REIT - Navigating through the storm

14 Aug 2023
  • 1H23 DPU of 2.46 US cts (-30.1% YoY) was in line with our estimates at 50% of FY23e forecast. The decline of was due to Prime increasing management fees paid in cash from 20% to 100%, higher interest expense, lower occupancy, and higher operating expenses. Excluding the change in management fees paid in cash, DPU is still down c.24% YoY.
  • Portfolio occupancy dropped to 85.6% from 88.6% in 1Q23, with overall rental reversions of +9.5%.
  • Maintain BUY, DDM-TP lowered from US$0.46 to US$0.39. Our cost of equity increased from 13.75% to 15.95% due to the inherent weakness of the US office sector. Catalysts include improved leasing and a greater return to the office. Prime is currently trading at 0.25x P/NAV, and we believe that most of the negatives are already priced in. The current share price implies FY23e/FY24e DPU yield of 25/27%.

 

 

 

The Positive

+ Extension of debt maturities. During the quarter, Prime extended the maturity of its term loan and revolver under its main credit facility (c.34% of total loans) by one year to July 2024. As a result, Prime has no refinancing obligations till July 2024. This gives Prime more time to secure refinancing and some respite amid the credit crunch situation in the US.

 

+ Gearing decreased 0.9ppts QoQ to 42.8%. 80% of debt is either on fixed rate or hedged (79% in 1Q23), with 63% of debt hedged or fixed through to 2026 or beyond. Prime’s effective interest cost for the quarter increased marginally QoQ from 3.7% to 3.8%, and its interest coverage ratio is at 3.4x. Prime has a buffer of c.5.1% and c.15% from 2022 year-end asset valuations before gearing hits 45% and 50% respectively.

 

The Negatives

– Portfolio occupancy decreased to 85.6% from 88.6% in 1Q23. The biggest contributors to the decline were 171 17th Street (-14.5ppts QoQ to 80.5%) and Park Towers (-11.4ppts QoQ to 74.3%).

 

About the author

Darren Chan
Research Analyst
PSR

Darren has over three years of experience on the buy-side as a fund manager. During his time as fund manager, he has managed multiple funds and mandates including dividend income, growth, customised, Singapore focused and regionally focused funds. He graduated from the University of London with a First-Class Honours degree in Banking and Finance.

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