Prepare for a 14% valuation drop in PRIME US and a lower drop in Keppel Pacific Oak

Manulife US REIT has announced its year end valuation and it did not look pretty. For year 2023, Manulife US REIT reported a 22% drop in valuation, primarily due to increase in discount rate and cap rate assumption used.

How about PRIME US, Keppacoak REIT?

Cap Rate assumption, discount rate and higher leasing cost will definitely affect the 2 REITs. PRIME US REIT will be affected more due to its loss of tenants especially for One Washingtonian Centre. For PRIME US REIT, I am looking at a decline of valuation of 14% while for Keppacoak, it should be an approx decline of 10%.

Effects

Keppacoak REIT should remain safe, standing at 43-44% leverage ratio. But for PRIME US REIT, it is different.

PRIME US REIT Difficulty

I expect PRIME US to slightly breach the 50% leverage ratio and along with it a few convenants. In my view, PRIME US has to do a few things urgently to return to below 50% leverage:

Firstly, reduce the dividend payout ratio from 100% to 90%. This should help the REIT reduce its leverage by 0.3 percentage point per year. Secondly, PRIME should evaluate if it can sell 1 building to lower its leverage. Thirdly, equity raising should be on the card if the second step fails because PRIME needs to enter the negotiating table with lenders on a stronger financial footing. In my view, a 1 to 5 rights may happen to recap the REIT with about US$35 million with underwriting taken by the REIT manager.

What I Hope PRIME US REIT Manager will Do

Out of goodwill, PRIME US REIT manager should consider the witholding of its cash base fees and use it as proceeds to fund the probable right raising or if there is no rights, give a 1 year grace period interest free.

A sponsor led loan should not be decided because such a measure should only be considered out of desperation, unless the sponsor is willing to backstop with a loan that is SOFR + 2.0%; otherwise, it is a no-go/ investor unfriendly action for a loan rate that is higher than SOFR + 2.0%.