Prime US REIT

[CY09]

While I know that share price movements is not a good topic to speak about for stock analysis here. I need to use it as a reference. For the past 3 months, the share price of Prime US has gyrated between 9 cents and 20 cents. Much of the price movement has been un-related to the company such as the suspension of dividends by Keppacoak or the sudden delay in FY reported by Keppelpacific. The price discovery of this REIT is in a flux and any small news can lead to a large % change which investors will not expect for in REITs

The only related share movement (down by 10%) is due to the resignation of its CEO at short notice.

PRIME is in the weak US office market and among the 3 REITs, it has the youngest property portfolio which explains why its CAPEX has been relatively lower than Keppel and Manulife.

However for those investors to be, the debt profile of PRIME shows that it has a maturing bank loan of US$478 million (~70%) which it is in the process of negotiaiting with banks to renew in July 2024. This is the Damascus sword hanging over the REIT. A successful renewal and we could see share prices doubling. If the loan facility is downsized to below US$478 mil, I will not be surprised that a rights raising will be done.

The REIT is setting aside US$40 million by reducing its dividends in case things go south. With free cash generation ability of about US$50 million per annum, it is definitely a good REIT to own (but only after the conclusion of the debt renewal for July 2024).

[weijian]

While I know that share price movements is not a good topic to speak about for stock analysis here. I need to use it as a reference. For the past 3 months, the share price of Prime US has gyrated between 9 cents and 20 cents. Much of the price movement has been un-related to the company such as the suspension of dividends by Keppacoak or the sudden delay in FY reported by Keppelpacific. The price discovery of this REIT is in a flux and any small news can lead to a large % change which investors will not expect for in REITs

The only related share movement (down by 10%) is due to the resignation of its CEO at short notice.

PRIME is in the weak US office market and among the 3 REITs, it has the youngest property portfolio which explains why its CAPEX has been relatively lower than Keppel and Manulife.

However for those investors to be, the debt profile of PRIME shows that it has a maturing bank loan of US$478 million (~70%) which it is in the process of negotiaiting with banks to renew in July 2024. This is the Damascus sword hanging over the REIT. A successful renewal and we could see share prices doubling. If the loan facility is downsized to below US$478 mil, I will not be surprised that a rights raising will be done.

The REIT is setting aside US$40 million by reducing its dividends in case things go south. With free cash generation ability of about US$50 million per annum, it is definitely a good REIT to own (but only after the conclusion of the debt renewal for July 2024).

hi CY09,

Didn't PRIME US Reit announced a 90% cut in dividend ~1 month back? With the new dividend, annualized yield is ~mid single digits, which is actually lower than many S-REITs. And when they announced a 1-for-10 bonus issue, it may also have an effect to reduce the share price post XD.

The 3 US Reits borrowing for CAPEX rather than funding it through cashflow, reminds me of the way that Trusts' structure work, ie. paying distributions out of cashflow. A few noticeable names listed on SGX like APTT and HPT comes to mind. For the latter, it was also hit with its portfolio of ports losing competitiveness to Mainland China ports. It is quite similar to the structural decline in CRE occupancy/ demand for US office REITs.

In a recent podcast, Bill Ackman said something instructive - In investing, we don't have to make money back the way we lost it.

[CY09]

For the 3 US REITs, market seems to have priced in that dividends will be suspended. Hence when PRIME maintained a small dividend prices went up. The use of CAPEX for funding happens for all REITs. It is just that in Singapore, most capex is borne by tenants unlike how USA works. As a result, the US reits have a natural growth in leverage if they keep paying 100% in payout ratio.

This is something for investors to know. In terms of CAPEX per dollar for portfolio, Keppac (KORE) has the highest capex per dollar with PRIME being the lowest. The CAPEX incurred is added to the value of each building

These are quite unknown facts that Singapore investors have to find out on their own.

My second order observation and that I am interested to know is if these REITs could sell at whatever the value is valued for each building (which includes the CAPEX for each building). Both Manulife and KORE are likely to be tested in this scenario: for Manulife, its due to its leverage, for KORE, its due to its high capex needs because of its properties.

Of course, these 3 REITs can always devalue the CAPEX (inclusive of other prices) in its annual review. But its something interesting I hope to find out

[weijian]

hi CY09,

I thought this "new learning" actually helps me to understand that landlords have bargaining power in Spore (against businesses), and businesses have bargaining power in US (against landlords). This new learning is good knowledge for me to know how to invest - landlords in Spore and businesses in US.

As for your 2nd question, I thought it is highly probable that theory (accounting book) and practice (sell on open market) are very different. And Manulife CEO has helped to confirm it:

“Would we look to increase the exposure at this point in time? Absolutely not,” he said. “Is there a vibrant liquid market we could sell into and realise a lot of value? No.” As a life insurer, Manulife has a rare luxury among investors of being able to retain its holdings without the pressure to refinance at unfavourable rates or incur big losses on buildings sales, thanks to the absence of mortgages on virtually all of its properties.
https://www.businesstimes.com.sg/compani...ments-peak

[CY09]

https://links.sgx.com/FileOpen/Responses...eID=797455

PRIME US REIT replies to questions provide some answers to the REIT's future. For Q4, mgmt is guiding for lower property revenue in 2024 due to the natural expiration of leases and the lack of backfilling. In the meantime, the REIT is preparing to do an overhaul of One Washington Centre to improve its take up rate. Its important to remember that in US, its the REIT managers who bear the CAPEX unlike Singapore's. For Q6, it shows the tepid response in the REIT manager's ability to backfill

Declining revenue, capex to maintain, it seems the worse is not over yet for the US office space. Manulife US REIT replies to their recent sales progress too hints of a tepid market in which there seems to be a wide gap in expectation between buyers and sellers.

I will not be surprised end 2024, we might see another round of downward revaluation for all 3 US office spaces, MUST has been holding off its sale which I think is unwise due to its committed sales plan to bankers. PRIME is moving closer to its leverage limit

[weijian]

In general, delay begets more delays. Banks should be signing off documentation as fast as possible so that they can start earning your money ("return on capital"). So if they don't, they are probably more concern about "return of capital".

ANNOUNCEMENT IN RELATION TO PRIME’S US$600 MILLION CREDIT FACILITIES

Prime US REIT Management Pte. Ltd., as manager of Prime US REIT (“PRIME”, and the manager of PRIME, the “Manager”), refers to PRIME’s US$600 million credit facilities (the “Facility”).

The Manager is in the final legal documentation stage for the refinancing of the Facility and one of the four lenders in the syndicate has requested additional time to finalise their internal documentation for the refinancing. In this regard, the administrative agent (acting on behalf of all the lenders) has recommended, and the Manager and all the lenders have agreed to amend the maturity date of the current Facility to 19 August 2024 to facilitate this request.

The Manager would make another announcement once the Facility has been refinanced

https://links.sgx.com/FileOpen/Prime%20U...PRIME%20US$600%20Million%20Credit%20Facilities.ashx?App=Announcement&FileID=809494

[CY09]

https://links.sgx.com/FileOpen/Prime%20U...T%20-%20US$550M%20Credit%20Facility%2012Aug2024.ashx?App=Announcement&FileID=814997

It does seem it was the US banks who were slow in wanting to earn more money from PRIME.

Refinancing has been signed for maturity for July 2026 with option to extend to 2027. The new facility is for US$550 million and the current drawdown is US$504 million. In a sense, the REIT's financial status is now safe as long as it does not breach the 50% leverage ratio