4Q23 Results Analysis: Different, but the same
- 2H23 cash DPU of 0.25 UScts (10% of DI) and 1 for 10 Bonus Issue (43% of DI) equivalent to 1.03 UScts, a different approach vs peers for capital preservation. FY23 DI -25% y-o-y, in line.
- Key positives: i) good leasing momentum in 4Q23; ii) asset values decline of <10% y-o-y better-than-expected ; iii) positive rental reversions in 4Q23.
- Data points to watch: i) refinancing of debt expiring in July 2024; ii) ) whether gearing can be maintained within regulatory limits; iii) how the deleveraging target of US$100m in 2024 pans out.
- Maintain FULLY VALUED rating; TP of US$0.07.
What happened?
FY23 Distributable Income (DI) in line; asset values hold up better-than-expected; uptick in leasing momentum in 4Q23. 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, equating to c.43% of 2H23 DI. As such, FY23 DPU (incl bonus issue) is 3.74 UScts, -43% y-o-y vs 6.55 UScts in FY22. FY23 DI fell 25%, 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. The valuation decline 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 101 South Hanley and Promenade I&II, which saw cap rate compression of 75bps and 50bps respectively. Assets with the largest valuation decline were One Washingtonian (-36% y-o-y), Sorrento Towers (-16%) and 222 Main (-11% y-o-y). Average cost of debt stayed flat q-o-q at 4%. 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 2.7ppt 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, c. half are renewals and half are 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.
Our Views
Targets to deleverage by US$100m in 2024; all eyes on refinancing of debt expiring in July 2024.
As part its effort to be prudent on capital management, PRIME targets to execute up to US$100m of deleveraging in 2024 and is currently in 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 remain prudent in the use of capital. While PRIME has adopted a different distribution strategy compared to its peers, it has also taken steps to retain some cash from distributions for capital preservation. All eyes remain on two key major factors i) upcoming refinancing of US$600m credit facilities and ii) efforts to deleverage. Gearing at 48.4%, though within the regulatory limits, it is a little too high for comfort. We maintain our FULLY VALUED rating; TP of US$0.07.
| Summary of results (US$’m) | 4Q2023 | 3Q2023 | %q-o-q | 4Q2022 | % y-o-y | FY2023 | FY2022 | % y-o-y |
| Revenue | 40.1 | 40.2 | -0.3% | 40.6 | -1.2% | 159.8 | 163.0 | -2.0% |
| NPI | 23.0 | 23.4 | -1.7% | 22.9 | 0.3% | 93.6 | 97.9 | -4.5% |
| DI | 13.9 | 14.7 | -5.7% | 16.6 | -16.4% | 57.8 | 77.2 | -25.0% |
| DI (like for like – 100% cash) | 13.9 | 14.7 | -5.7% | 15.2 | -8.9% | 57.8 | 70.9 | -18.4% |
| DPU (est) | 0.25 | 1.24 | -79.8% | 1.40 | -82.1% | 2.71 | 6.55 | -58.6% |
| DPU (est) (like for like – 100% cash) | 0.25 | 1.24 | -79.8% | 1.28 | -80.5% | 2.71 | 6.01 | -54.9% |
| Portfolio occupancies (%) | 85.4% | 85.0% | +0.4 ppt | 89.1% | -3.7 ppt | |||
| Rental reversions | 9.6% | -2.0% | +11.6 ppt | 20.2% | -10.6 ppt | |||
| WALE (years) | 3.9 | 3.9 | – | 4.1 | (0.2) | |||
| Gearing (%) | 48.4% | 43.7% | +4.7 ppt | 42.1% | +6.3 ppt | |||
| Av cost of debt (%) | 4.0% | 4.0% | 0 ppt | 3.3% | +0.7 ppt | |||
| ICR (x) | 3.1 | 3.2 | (0.1) | 4.1 | (1.0) | |||
| Hedging Ratio | 79% | 78% | +1 ppt | 82% | -3 ppt | |||
| Leases expiring in FY2024 | 10.8% | 11.2% | -0.4 ppt | 13.2% | -2.4 ppt | |||
| Leases expiring in FY2025 | 16.3% | 18.5% | -2.2 ppt | 18.2% | -1.9 ppt |
* quarterly DPU are estimated;
Source: Company, DBS