• FY22 DPU of 6.55 US cts was slightly below our estimates, mainly due to higher interest expense (+27.2%) and lower occupancies (89.1%).
• Despite portfolio valuation declining 6.7% on higher discount and cap rate assumptions, gearing at 42.1% and interest coverage at 4.1x remains well within regulatory limits.
• Maintain BUY, DDM-TP lowered from US$0.88 to US$0.70 as we lower our FY23e-FY25e DPU forecasts by 12-15% due to lower occupancy and higher financing costs. Our cost of equity increased from 10.55% to 11% as we roll forward our forecasts. PRIME is our top pick in the US office sector for greater tenant exposure to STEM/TAMI sectors. Catalysts include improved leasing and a greater return to office. Prime is currently trading at 0.6x P/NAV and below pandemic lows, and we believe that most of the negatives are already priced in. The current share price implies FY23e/FY24e DPU yield of 13.6/14.7%.

The Positives

+ Strong positive rental reversions of 20.2% for 4Q22, continuing the trend of positive rental reversions for 11 consecutive quarters. Occupancy remained relatively stable, declining 0.5% QoQ to 89.1%. Leasing remains active, with activity coming from sectors such as scientific R&D services, finance, biotechnology, manufacturing and legal services. The 20.2% reversion was substantially from Crosspoint, where an existing tenant downsized from 84k sq ft to 57.5k sq ft and extended the lease to 2032, and a new tenant backfilled space and signed a lease till 2034 at >25% reversions.

+ 82% of debt is on fixed rate or hedged, with 66% of the total debt hedged or fixed through to mid-2026 and beyond. Prime has no refinancing obligations till July 2024. Prime’s gearing increased to 42.1% from 38.7% QoQ, mainly due to the decline in portfolio valuation, but remains well within regulatory limits. Its interest coverage ratio of 4.1x is also well above MAS’ threshold  of 2.5x to bring gearing limits up to 50%. Prime’s effective interest rate crept up to 3.4%, from 3.1% in 3Q22.

The Negative

– Portfolio value declined 6.7% due to higher discount and cap rate assumptions used by valuers. Across the board, cap rates increased by 50bps. All assets saw a valuation decline, with Reston Square (-14.2%, due to the non-renewal of anchor tenant), Village Center Station I (-12.1%) and One Town Center (-10.6%) having the biggest percentage declines.

Source: Phillip Capital Research - 17 Feb 2023