US Office Commercial REITs- PRIME Pulls Positive Surprise With Its Young Property Age.

The full year results for the 3 US Office REITs are out. Downward valuations, as expected were reported with varying magnitudes.

Below are their current financial health:

CAPEX Shock

To me what came as a surprise is the CAPEX needs of KORE's property portfolio. KORE spends more CAPEX than the rest. This is due to KORE's portfolio being the oldest among the 3. While KORE claims the higher CAPEX is needed to retain tenants, the main (probable) reason is due to the need to refurbish its old buildings to match tenants needs.

As a result of the higher CAPEX needs as compared to PRIME US, KORE has decided to suspend dividends. PRIME US REIT on the other hand, due to its smaller CAPEX by virtue of having newer buildings, has slashed it to 10% payout ratio with a plan to delever wtih US$100 million. 

On the point on CAPEX, its interesting to note KORE puts in nearly twice the CAPEX expenses but still obtains the same ratio of "NPI to property revenue" or "Revenue to Valuation" as compared to PRIME. This clearly shows the main reason why KORE needs to pay so much for its CAPEX is because its properties are old and there is a need to spend more to maintain. This showed Keppel Capital had tried to fool public investors by IPO'ing older assets in a way to get rid of the looming cash needs then. Keppel seems to have pulled a fast one over Singapore investors.

PRIME- All eyes will be on debt Maturing on Jul 2024

PRIME carries a significant risk where a 600 million debt facility is due July 2024. This is a make or break segment, if it succeds, PRIME will have a very strong chance of an upside and rebound. A failure to renew and there will be a massive haircut to building valuation during the firesale. PRIME management has to present to the syndicate of bankers that its properties are of good balance sheet, the manager is committed to the REIT future and preferably the sale of 01 building should be done before this. 

ManuLife US REIT Has to Execute Well

MUST did a year-end valuation. With the revaluation, the expected sales from Tranche 1 assets are still within range of the announced sales proceed in their December circular for Tranche 1 sale.

However the resultant leverage places MUST very close to 50% (estimation is 49.7%). The sale to Diablo to me will be difficult because it is of a Class B asset (least desired) and it has not undergone refurbishment since its completion in the 1980s. Hence, there may not be many interested buyers. If the US Commercial office issue persists until 2025, MUST might need to sell off 01 additional building in Tranche 2 because the next revaluation in end 2024 would put it above 50% leverage again.

Sale of Buildings

In all likelihood, both PRIME and MUST could be selling buildings at the trough of the business cycle to delever to safety. It is a neccessary move but one that is forced due to the breach of leverage.