Saturday, 29 July 2023

Prime REIT: A 18% Dividend Yielder for Accumulation

PRIME Reit has fallen due to the Manulife Saga where the latter did a surprise downward valuation on its properties.

To clarify my doubts, I had emailed PRIME Investor relations and received a reply that the REIT is not conducting a valuation exercise for this upcoming 1H results. The usual will be done year-end In addition, the REIT has spoken to valuers and auditors and no material change is expected. 

Safe For Now

With this, we can be sure for the next 6 months, PRIME will not be breaching any financial covenants nor MAS's regulatory limit. 

What's Next for 2024

Naturally with the expectation of a 0.5% hike from the Fed and the worsening of the US office rental situation, it is definite the capitalisation rate for PRIME properties will rise by at least 0.75%. Currently the valuation of PRIME's property are going at a Cap rate assumption of 6.25%-8.50%. It is likely for this year's 2023 annual report, we will see cap rate assumptions of 7.00%-9.25%.

With this, one can expect property valuation to decline another 12% from PRIME's reported segment. Therefore the leverage ratio will likely change from 43.7% to 49.7%. This means PRIME should just be slightly below the regulatory limit.

However after 2024, cap rates should fall because the US federal reserve is expected to reduce their interest rates from the last quarter of 2024.In this sense, 2025's cap rate should not increase but reduce a little.

Expected Dividends

Dividends wise, I am expecting 1H2023 to report in a 2.0 US cents dividends. However, with the rising SOFR rate which its loans are pegged to, one should expect some decline in dividends in the 2H. Hence I'm expecting a 1.5 US cents for 2H 2023. This brings the total of 3.5 US cents, equating to a yield of 18% at current price.

All in all, its a REIT that can be considered. However, investors should set aside some of the dividends they receive in case equity raising is needed by the company if conditions deteriorate. 

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