Amazon at the corporate level has instructed its staff to return for at least 3 days in a week.
This to me signals the return of demand for office spaces for USA. It is likely the WFH culture will be reduced dramatically on the basis of improved productivity.
Effects on PRIME REIT
With Inflation still high and an expected increase in demand for office spaces due to US firms stipulating periods of time to work at the office, I expect further positive rental revisions for 2023. This means higher rentals. I am forecasting revenue increase of 6%. (US$163 mil --> US$172.8 mil)
With the increase in interest rates for the next full financial year, I forecast an increase of interest expense by 13% as compared to this year's. (US$21.6mil--> US$24.4mil)
In 2022, there was a deferred tax expense of US$13.9 million due to revaluation losses. I do not expect another of the same magnitude, however, with the rise in cap rate, I expect further losses and hence a positive deferred tax expense of US$2 million. Hence there will be a cash outflow of US$11 million in adjustments.
In summary, I expect a decrease in income avaliable for distribution from US$35 mil to US$31 mil. This means US Prime REIT will have to a DPU decrease by 11.4%. At current DPU, PRIME REIT is giving US 6 cents per share; factoring the decrease, this means a future DPU of US 5.3 cents per share.
Currently PRIME REIT is at US$0.42, based on my estimation it is at 12.6% dividend yield. In my view, this is too cheap. A reasonable yield for US office REIT is in the region of 9-10% yield which is about US 55 cents.
Given this, I will be adding to my position in PRIME REIT in the next few market days.
<Currently Vested in PRIME REIT>
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