3Q23 Results Analysis: Navigating headwinds ahead
- 3Q23 estimated DPU -24% y-o-y to 1.24 UScts, mainly due to higher management fees paid in cash (100% from 20% previously), slightly ahead. On q-o-q, DPU grew 2.5%.
- Key positives: i) Some backfilling of vacant space were done this quarter; ii) re-amenitize One Washingtonian Center to drive leasing interests ; iii) slight negative reversions due to conversion of a short-term lease
- Data points to watch: i) gearing increase to 43.7% though ICR at 3.2x has some buffer; ii) year-end asset valuation iii) refinancing of debt expiring in 2024
- Maintain HOLD rating; TP of US$0.18
| Summary of results (US$’m) | 3Q2023 | 2Q2023 | %q-o-q | 3Q2022 | % y-o-y | 9M2023 | 9M2022 | % y-o-y |
| Revenue | 40.2 | 39.3 | 2.3% | 40.6 | -0.9% | 119.7 | 122.4 | -2.2% |
| NPI | 23.4 | 23.6 | -0.7% | 24.2 | -3.3% | 70.6 | 75.0 | -5.9% |
| DI | 14.7 | 14.3 | 2.6% | 19.2 | -23.4% | 43.9 | 60.6 | -27.4% |
| DI (like for like – 100% cash) | 14.7 | 14.3 | 2.6% | 17.7 | -16.6% | 43.9 | 55.7 | -21.0% |
| DPU (est) | 1.24 | 1.21 | 2.5% | 1.63 | -23.9% | 3.70 | 5.15 | -28.2% |
| DPU (est) (like for like – 100% cash) | 1.24 | 1.21 | 2.5% | 1.50 | -17.3% | 3.70 | 4.73 | -21.8% |
| Portfolio occupancies (%) | 85.0% | 85.6% | -0.6 ppt | 89.6% | -4.6 ppt | |||
| Rental reversions | -2.0% | 9.5% | -11.5 ppt | 10.1% | -12.1 ppt | |||
| WALE (years) | 3.9 | 3.9 | – | 4.0 | (0.1) | |||
| Gearing (%) | 43.7% | 42.8% | 0.9 ppt | 38.7% | 5 ppt | |||
| Av cost of debt (%) | 4.0% | 3.9% | 0.1 ppt | 3.2% | 0.8 ppt | |||
| ICR (x) | 3.2 | 3.4 | (0.2) | 4.5 | (1.3) | |||
| Hedging Ratio | 78% | 80% | -2 ppt | 83% | -5 ppt | |||
| Leases expiring in FY2023 | 7.0% | 9.0% | -2 ppt | 15.9% | -8.9 ppt | |||
| Leases expiring in FY2024 | 11.2% | 13.5% | -2.3 ppt | 15.7% | -4.5 ppt |
* quarterly DPU are estimated; FY22 reversions are estimated
Source: Company, DBS
What happened?
3Q23 was a relatively stable quarter q-o-q with DPU showing slight uptick while occupancy held relatively stable despite large vacate at VCS1; gearing inched up to 43.7%.
Prime reported 3Q23 estimated headline DPU -24% y-o-y to 1.24 UScts, largely due to PRIME raising management fees paid in cash from 20% to 100%. 9M23 headline DPU -28% y-o-y to 3.70 UScts, slightly above our estimates. On a like-for-like basis, estimated 3Q23 DPU -17% y-o-y on higher interest cost and absence of one-off termination fee income. On q-o-q, 3Q23 estimated DPU grew 2.5% q-o-q. 3Q23 revenue grew 2.3% q-o-q but NPI fell 0.7% q-o-q. Gearing increased by 0.9ppt q-o-q to 43.7% from 42.8% in 2Q23. Average cost of debt inched up by 10bps q-o-q to 4% vs 3.9% in 2Q23. Operationally, PRIME reported a relatively stable quarter. Portfolio occupancy inched down marginally to 85% from 85.6% despite a large vacate at Village Center Station 1 “VCS1” (occupancy fell to 55.1% from 68.1%) and Washingtonian Center (fell to 80.2% from 83.3%). Some backfilling offset the decline in occupancy, notably Tower 909 (+3.8ppt q-o-q to 87.8%), Reston Square (+0.9ppt q-o-q to 47%) and Park Tower (+0.9ppt q-o-q to 75.2%). 3Q23 rental reversions were -2%, largely impacted by 1 lease which was renewed at a lower rate compared to prior short-term extension rate. Leasing activities jumped to 145.6k sqft from an average per quarter of 66k sqft in 1H23 mainly due to the renewal of Charter Communication of 95k sqft. Prime highlighted of notable leasing discussions are underway at VCS1 and Park Tower, albeit relatively long lead times. With key tenant, Sodexo, leaving One Washingtonian Center at the end of 2023, PRIME is taking this opportunity to re-amentize the asset which will hopefully drive more leasing interests to the asset.
Our Views
Focus on gaining leasing traction while continue to look for potential deleveraging strategies; all eyes on year-end asset valuation and refinancing of debt expiring in Jul24.
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 remain prudent in the use of capital. All eyes are on two key major factors i) the year-end asset valuation and the impact to its gearing at c.43% and ii) refinancing of upcoming US$400m debt expiring in Jul24. Given that buffer to 45% gearing level is limited (c.2.4% of asset value movement), gearing could likely hit above 45% gearing level. This is typically an uncomfortable level for investors despite there’s still room before ICR hits 2.5x. We maintain our HOLD rating; TP of US$0.18.
More details after the briefing tomorrow.