Prime US REIT (SGX: OXMU) was listed on the Mainboard of the Singapore Exchange in July 2019 and focuses on investing in office properties located in key office markets across the United States.

As of 30 June 2024, its portfolio comprises 13 Class A freehold office properties strategically located in 12 key office markets across the US (in Atlanta, Dallas, Denver, Sacramento, Salt Lake City, San Antonio, San Diego, San Francisco Bay Area [Oakland], St Louis, Suburban Maryland [Washington DC], Suburban Virginia [Washington DC], and Philadelphia), with a total asset under management (AUM) of US$1.3 billion.

The REIT’s unit price has seen a significant decline, dropping from a peak of 97.5 US cents in February 2020 (note: although listed on the Singapore Exchange, it trades in USD) to just under 20.0 US cents at the time of writing - representing a steep 77.5% drop.

Last week, I had the privilege of meeting up with the REIT’s management team – Chief Financial Officer Ms Cindy Teo and Vice President of Investor Relations Mr Nigel Nai. What was initially planned as a 1.5-hour meeting extended beyond 3 hours, allowing me to gain valuable insights and clarify concerns raised by retail investors (to that end, I engaged with the InvestingNote community and reached out to some retail investors to gather questions).

In this post, I will share my key takeaways from that meeting, along with a detailed review of the REIT's performance over the past 4 years, its portfolio occupancy, debt profile, and distribution payouts.

Let’s dive in:

Financial Performance

Prime US REIT’s financial year ends on 31 December.

Since the REIT was listed in July 2019, this section will focus on its full-year post-IPO financial performance over a 4-year period from 2020 to 2023, as summarised in the table below:

Here are a few key observations:

1. Over the last 4 years, growth (in percentage terms) has been on a consistent decline.
   
2. Net property income in 2022 dropped by 3.0% to US$98 million compared to the previous year. This was primarily due to a 16% increase in property operating expenses, mainly attributed to contributions from One Town Center and Sorrento Tower, both of which were acquired in July 2021.
   
3. For FY2023, gross revenue fell by 1.8% year on year to US$160 million, driven by lower rental income resulting from a drop in occupancy. Additionally, a 2% rise in property expenses, mostly due to higher non-cash amortisation of leasing commissions, led to a 4.1% year-on-year decrease in net property income to US$94 million. The 24.7% decline in income available for distribution to US$58 million was attributed to a combination of higher finance expenses, lower net property income, and the manager’s decision to receive 100% of the base fee in cash for 2023 (as opposed to 20% in cash and 80% in units in the previous year).

I inquired about the rationale behind the manager’s decision to receive 100% of the base fee in cash, knowing it would significantly reduce the income available for distribution. The explanation given was that continuing to receive 80% of the base fee in units (as done in 2022) would lead to a substantial dilution of unitholdings, given the unit price was trading at a very low level.

Distribution Payout to Unitholders

Prime US REIT distributes payouts on a semi-annual basis.

The table below shows the REIT's distribution payouts over the past 4 years (from 2020 to 2023):

Rising interest rates have impacted the distribution payouts of REITs in recent years, and this has affected not only Prime US REIT but other REITs listed on the Singapore Exchange as well.

Notably, Prime US REIT’s distribution per unit (DPU) for 2023 plummeted by 58.6% year-on-year to US$0.0271. This sharp decline was due to the retention of 90% of distributable income to fund capital expenditures aimed at enhancing property appeal to prospective tenants (facilitating for more favourable lease terms), reducing borrowings, and strengthening its cash reserves. This is particularly important for landlords in the US, as tenants typically assess a landlord's financial strength before committing to leases.

Additionally, there was a 1-for-10 bonus issue declared for 2023. I sought clarification regarding the rationale behind this decision, especially concerning potential dilution. I was assured that there is no dilution for existing unitholders since all unitholders receive the bonus issue. The management explained that this move was intended as a way to reward unitholders, with the potential for greater returns as the unit price recovers alongside improved performance, in which they expressed confidence.

I also inquired about the timeline for the recovery of the REIT’s distribution payouts. The management indicated that 2024 is expected to remain a weak year for payouts (as 90% of distributable income will continue to be retained for capital expenditures and debt reduction). However, meaningful improvements in distribution payouts are anticipated in 2026, as contributions from new leases come in, alongside benchmark lending rates stabilising around 3%. This aligns with my own projections shared at the REITs Symposium back in May, where I estimated that REIT distribution payouts would begin to show year-on-year improvements around the same time.

Portfolio Occupancy Profile

The following table is Prime US REIT’s portfolio occupancy profile over the last 4 years (between 2020 and 2023):

In 2023, the REIT’s top 10 tenants contributed 42.2% of its Cash Rental Income (CRI), with the largest tenant, Charter Communications, accounting for 8.7%.

In addition to Charter Communications, the other top 10 tenants include listed companies such as Goldman Sachs Group (5.4%), Dexcom (4.7%), Wells Fargo Bank (3.2%), Bank of America (2.5%), and Apache Corporation (2.2%).

I observed a decline in the REIT’s portfolio occupancy over the last 4 years, particularly in 4 properties. I sought updates on efforts to backfill vacancies in these properties:

1. Village Center Station I (occupancy rate of 55.1% in 2023) – Located next to the single-tenant Village Center Station II, leased to Charter Communications, the REIT’s management shared that there is interest from several companies, including Charter Communications itself, which is considering relocating employees from other office locations to Village Center Station I. They expressed their confidence in stabilising the occupancy by 2025.
   
2. Tower I at Emeryville (occupancy rate of 69.1% in 2023) – Although leasing momentum has been slower for this property, the management noted increased tenant demand in recent months, with discussions ongoing with potential tenants. Despite higher crime rates in nearby Oakland, the property’s proximity to a police station offers security and reassurance to prospective tenants, making it an attractive leasing option.
3. Park Tower (occupancy rate of 72.5% in 2023) – The REIT is in negotiations with a large government-sector tenant for a long-term lease. These negotiations are expected to conclude between late 2024 and early 2025, and once finalised, the property's occupancy should stabilise at around 90%.
   
4. 171 17th Street (occupancy rate of 78.6% in 2023) – Management reported an improvement in leasing demand, and they are in talks with prospective tenants to fill the remaining vacant space.

With debt refinancing now completed (details in a later section), the management has shifted its focus to increasing the REIT’s portfolio occupancy to 90%. However, they do not expect this to happen within the next 12-18 months, as negotiations for some of the larger leases typically takes longer.

Regarding the decline in the REIT’s portfolio WALE, the management shared that it was initially at about 5 years at the time of its IPO. However, as leases are now gradually approaching expiration, they are actively working on renewals. They also conveyed confidence in successfully renewing the leases set to expire in the remaining months of 2024.

On potential acquisition activities, the REIT’s management remains open to opportunities to acquire “distressed properties.” However, they are also mindful of the MAS regulation on the aggregate leverage limit.

Lastly, I inquired about the recent divestment of One Town Center, acquired in 2021, which was sold in May 2024 at a 3% discount to its valuation. The management explained that the sale was made to reduce debt and strengthen the REIT’s balance sheet, which is important for meeting tenant requirements in the U.S. market. The property was chosen for divestment after careful deliberation because the transaction amount, under US$100 million, made it easier for buyers to secure financing. Furthermore, in a market where many assets were selling at steep discounts, achieving a sale at just a 3% discount to valuation was considered a favourable outcome.

Debt Profile

The following table illustrates Prime US REIT’s debt profile recorded over the last 4 years (between 2020 and 2023):

One thing to highlight is the significant increase in the REIT’s aggregate leverage, which rose from 42.1% in 2022 to 48.4% in 2023. This was driven by an expansion in cap rates, an 8.7% drop in portfolio valuations, together with additional borrowings to fund capital expenditures for investment properties. At this leverage level, the REIT still has US$47.4 million of debt capacity before reaching the 50% gearing limit.

Naturally, this is a major concern for unitholders. However, the management shared that a key milestone was achieved in July 2024, when they successfully refinanced their borrowings (after 8 months of negotiations) for a 2-year period, with an option for a 1-year extension. They also secured an additional US$150 million in revolving loan facilities, which the REIT plans to use for asset enhancement initiatives. Notably, the same 4 lenders, all US-based and more familiar with the assets and broader situation, have continued their support, reflecting their confidence in the REIT’s quality.

Regarding the target aggregate leverage level, the management has set it around 45.0% in the near-term, considering the current high interest rate environment. As for future equity fund raising to reduce its aggregate leverage, the management gave their assurance that they will not pursue such exercises solely for this purpose, recognising that it is generally unpopular among existing unitholders due to dilution of unitholdings. They also believe that with strong leasing momentum, property valuations will recover (the next revaluation is scheduled for December 2024), and along with expected interest rate cuts, the REIT's aggregate leverage should improve even with the same level of debt.

Closing Thoughts

The REIT is faced with 2 significant challenges: debt refinancing and filling vacant spaces in its properties.

Having successfully refinanced its borrowings in July 2024, the primary focus has shifted to increasing portfolio occupancy to 90%. Additionally, the REIT’s CEO, Mr Rahul Rana, is personally overseeing these lease negotiations. For context, Mr Rana was instrumental in the REIT’s initial listing, as he previously worked with the Sponsor (KBS, one of the largest US commercial real estate managers) before taking on his role as CEO. However, the management has urged patience, noting that securing favourable leases requires time, particularly the large ones.

Once these vacant spaces are filled, the contributions from new tenants will start reflecting in the financial results. Improved financial performance, combined with a gradual reduction in benchmark borrowing rates over the next 2 years, is expected to lower finance costs, allowing the REIT to increase its distribution payout to unitholders. The management mentioned that a material improvement may occur in 2026.

Personally, the 3-hour meeting with Ms Cindy Teo and Mr Nigel Nai offered me valuable insights into the REIT, to which I’m very thankful for. I was impressed by their openness about the challenges and the steps they are taking to resolve them. They were also realistic about the time needed to overcome these pressing issues.

When selecting companies to invest in, I look beyond just the numbers in business updates, quarterly, and annual reports. I also consider the people behind the business.

If you’re wondering whether I’m considering an investment in the REIT, the answer is yes – it’s now on my radar. Following my meet up with the management, I have confidence in their ability to steer the REIT in the right direction. However, patience is required, and I believe any substantial improvements in financial performance may only materialise in 2026 or 2027, with a corresponding increase in unit price likely around that time.

If you’re wondering about the risks of investing in the REIT, one key concern is that while there’s been an increasing trend of companies, like Amazon Inc, ending flexible work arrangements and bringing employees back to the office five days a week (leading to higher demand for office space), it’s still too early to tell if this will result in employees switching to companies that continue to offer flexible working. If that happens, those businesses may be forced to reconsider flexible work policies and reduce their office space again. If this scenario plays out, it could negatively impact REITs focused on the U.S., such as Prime US REIT. Only time will tell.

This concludes my review of Prime US REIT. For those who raised concerns, I hope this post has addressed them. For others, I hope this has provided a clearer understanding of the Singapore-listed REIT.

Lastly, please remember that everything shared here is purely for educational purposes and does not constitute any buy or sell recommendations. Please do your own research before making any investment decisions.

Disclaimer: At the time of writing, I am not a unitholder of Prime US REIT.

The post Prime US REIT: A 4-Year Financial Performance Breakdown and Insights from Management first appeared on The Singaporean Investor.