2H23: Preserving Capital But Charting A Unique Course Of Action
Portfolio occupancy inched up 0.4ppt qoq to 85.4% in 4Q23. Leasing momentum has picked up and significant leasing discussions are underway for Park Tower and One Washingtonian Center. PRIME retained US$25.6m and payout ratio was only 10.4% in 2H23 to preserve capital. Management targets to execute up to US$100m of deleveraging in 2024. Valuation is attractive with distribution yield at 20% for 2024 and 42% for 2025 and P/NAV at 0.22x. Maintain BUY. Target price: US$0.45.
RESULTS
• Prime US REIT (PRIME) reported DPU of 0.25 US cents for 2H23, representing a payout ratio of 10.4%. The board has declared a 1-for-10 bonus issue to acknowledge unitholders’ support for PRIME’s efforts to strengthen its capital position.
• Operations started to stabilise. Gross revenue and NPI decreased slightly by 1.1% and 1.5% yoy in 2H23 due to lower occupancy and higher property operating expenses as a result of more employees returning to work at their office premises. NPI margin narrowed by 0.4ppt yoy to 57.7% due to an absence of lease termination income (3Q22: US$1.3m). Interest expenses increased 29% yoy in 2H23. Management has elected to receive 100% of base fee in cash for 2023.
• Leasing momentum has picked up, with leases for 304,100sf of office space executed in 4Q23, more than doubling on a sequential basis. Two of its top 10 tenants have renewed their leases: a) Charter Communications extended the lease for 94,300sf at Village Center Station I in Denver by three years in Jul 23, and b) Matheson Tri-Gas expanded by 19,600sf to 118,700sf at Tower 909 in Dallas in Jan 24. Overall, PRIME achieved an encouraging positive rental reversion of 9.6% in 4Q23. PRIME could sustain the positive rental reversion going forward as in-place passing rents remain below asking rents by 6.5%.
• Portfolio occupancy improved 0.4ppt qoq to 85.4% in 4Q23. Occupancies at Crosspoint in Philadelphia, Tower 909 in Dallas and One Washingtonian Center in Washington DC improved 2.9ppt, 3.7ppt and 6.1ppt qoq respectively to 100%, 91.5% and 86.3%.
