Friday 23 February 2024

Prime US REIT On Survival Mode And Signs of Green Shoots For Entire US Office Segment.

Prime US REIT ("Prime") has amazingly announced a better than expected results. I was expecting it to have breached its banking covenants after valuation decline. However, its aggregate leverage ratio is still within 50% and that it is giving out bonus units and 10% of its distributable income as dividends while retaining the rest for CAPEX and refinancing. Not surprisingly, its languishing unit price rebounded sharply on 22 February 2024. There are a few very interesting announcements by the management of Prime that is worth highlighting and which gives some idea on whether things are starting to turn around for US office commercial sector.

1. Prime US REIT seems to be confident to refinance the US$600Mil that is due in July 2024.
Prime plan to pay down US$100Mil of debt in 2024. It is also already in constructive refinancing discussions with the lenders of its US$600Mil credit facilities due in July 2024. From the optimism and upbeat tone displayed by its press release and public relations, I reckoned that their management team is confident of clearing the upcoming financial loan extension hurdle. This is a good sign.  

2. Pipeline of new office supply has dwindled and continued to fall.
This seems to be a major turning point that is being prominently highlighted by the management of Prime. There are 2 main factors which I will briefly elaborate on below:
2(a) Office ground-breakings and deliveries fell to an over 20-year low in 4Q2023.
Deliveries of new office space has fallen from 85Mil sqft 4 years ago to 46Mil sqft in 2023.

2(b) There are quite a number of conversion of excess commercial office building supply into residential buildings.
The US federal government and major US cities have been introducing incentives for building owners to convert their office buildings into residential buildings to address the excess supply in commercial and excess demand in residential apartments. Incentives of up to 75% discount on future tax assessments for buildings that convert commercial space into residential space are being dangled. 

2021-2023 has seen such offer soaring and being taken up by building owners. There were conversion activities of a 10 year high of 18.8Mil sqft of office space in 2023.

Parting thoughts
While I am impressed by the growth in leasing momentum and the brightly painted picture of record reduction in US office space supplies by the management of Prime, I am still apprehensive on whether we have seen the rock bottom of the US office sector. Ultimately, the high gearing ratio of 48.4% of Prime is just 1 small step away from a fire-sales of its office properties. 

(Note: On 5 February 2024, I had already disposed all my current holdings of Prime US REIT at US$0.16 per unit in order to mitigate my risk exposure to US office REITs. It was a lucky move as Prime US REIT has plunged by another whopping <-19%> to US$0.130 per unit as at noon of 23 Feb 2024. I have since redeployed the proceeds to other growth stocks instead of REITs.)

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