PRIME US REIT: Survivial Mode, Need for Deleveraging to Protect Itself

PRIME US REIT has released its 3Q results. Net property income has reduced slightly and leverage ratio has remained at 43.7%. With an expected downward valuation in properties, my take is that the leverage ratio will be at 49-50% for its 4Q results ; this means the Interest Coverage ratio (ICR) is key to the attractiveness of the REIT and its survival.

Sodexo Vacancy

One negative remains - the departure of Sodexo. While rental reversions continue to be positive, the loss of Sodexo will be immediately felt at the start of 2024. Currently about 10-15% of Sodexo vacated spaces has been backfilled and more leasing momentum

With interest expenses still rising by about 10 basis points each quarter, it seems at the end of 1H 2024, PRIME will experience a fall of 5% revenue while interest expense will increase by about 6%. This will pull down its ICR to about 2.8-2.9 times ICR.

Renewal of PRIME debt maturing in July 2024

Majority of PRIME's debt will mature in Jul 2024. Given the weak US office commercial space, PRIME will likely need to refinance its loans at a higher margin/rates.In its debt hedging profile slides, PRIME has stated that 330 mil has been hedged, with about 154 mil being unhedged. This points to a further increase in interest cost once investors go past 2Q 2024.

In all likelihood, the speed of rise in interest expense will increase. Given that 154 mil (20% of the loan) will increase in interest expense by a large degree, I am expecting all in interest expense for PRIME REIT to be at 4.8% for Q4 2024.

Hopefully, the REIT would be able to backfill the vacancy left by Sodexo then. Otherwise, it is a definite that ICR will breach 2.5 times and the REIT has to delever. A US$50 million deleveraging should ensure the REIT's survival.

Ways To Delever

Ideally, PRIME should sell one of its mid size property with good occupancy to ensure the REIT is on a strong footing to survive this crisis. Should a sale be done in the next few months, it is a definite positive because investors do not need to worry of an overhang of a struggling tenancy and the risk of breaching its debt conditions with its lenders.

Alternatively, the less favourable option is a share raising which is discussed quite frequently. In my view, if the manager wanted this option, it should have been more decisive and raise it when its market cap is higher US$200 million. Doing it at this juncture is too dilutive to shareholders based on the number of shares to be issued

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