Thursday 16 May 2024

PRIME US REIT: Sale of 01 Building Makes it Safe and Management Confident of Refinancing

Yesterday's announcement saw PRIME REIT divesting One Town Centre (OTC) at about 3% lower than its valued price at end 2023.

As said in my earlier post, PRIME US REIT needs to sell 1 to 2 buildings to ensure the financial safety of the REIT. This has happened and I am confident the REIT can stay afloat.

Refinancing Risk

A $478 million debt is due. During the latest AGM, the CEO said he is confident that the refinacing will be completed by the deadline of July 2024. With the sale of One Town Centre conciding with expiration of the current debt, what I am infering is that the new debt principal will likely be of a smaller amount (probably a $450 million loan).

However, with OTC sale and adequate cash balance, it is likely a refinancing can be completed in time.

Current Loan Profile

What many investors do not see is that the OTC loan is the most expensive loan on PRIME REIT's book at SOFR + 1.65%. In addition, with the leftover cash from One Town Centre's sale, PRIME REIT will use it to repay some of the due July 2024 loan principal.

For the refinanced loan, I do not expect a SOFR+1.15% margin. My expectation is that it will be a SOFR+ 1.7% loan similar to that of Sorrento Towers/One Town Centre. Furthermore $155 mil of PRIME's hedging will be lost  This mean despite the pay down in loan principal and cancellation of One Town Centre's loan, PRIME REIT's interest expense year on year will not fall. Instead I expect further rise in interest expense to about US$30 million per year.

Cashflow and Dividends

Interest expense is US$30million. Manager base fee is US$6.2 million, Trustee Fee is US$2 million.

The loss of OTC and decline in occupancy could place NPI at about US$82 million. CAPEX should remain at US$24 million.

This means the REIT is in a position of generating US$20 million of cash this year. With plans to strengthen the REIT's equity and pay down the loan, a significant portion of cash could be retained. I will not be surprised PRIME REIT pays out only a dividend of 0.5 cent per share for the full year. I do not want to see PRIME US doing another share bonus because it does nothing for shareholders. 

Give 0.5 cent dividend and explain it or otherwise...

Dividend of 90% of Taxable Income to Get Tax Breaks

During AGM, the CFO revealed in order for the REIT to continue achieving tax breaks from USA, they have to pay out 90% of the taxable income. In my view, PRIME might be able to earn US$25 million in taxable income this year. 

This means an approx US$22 million in dividends could be given to shareholders. If this holds true, this translates to a dividend of 1.6 cents per share for the full year.

This will be great news. But given the situation the REIT is in, I will not be surprised PRIME opts for a 0.5 cents dividend this year instead of 1.6 cents dividends. A 1.6 cents dividend may force PRIME to increase its borrowings due to cashflow. So I am expecting the worse case scenario where the REIT only announces 0.5 cents per share in dividend.

I do not agree with this but given the prudence the REIT has to be in, a 0.5 cents dividend look likely. I personally prefer the REIT to divest off another building and refrain from doing anymore office space acquisition forever to slowly delever 

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