Editor’s note: An earlier version of this story, which ran in print, included a quote about a local bank. Prime US REIT has requested that The Edge Singapore remove this quote by CEO Rahul Rana. An earlier version of the story also stated that Prime US REIT’s portfolio valuation was $1.34 billion as at June 30, as stated in the presentation slides of the REIT’s 1HFY2024 results. Prime US REIT has clarified that this figure, dated June 30, took into account the divestment of One Town Center, which — according to a July 10 bourse filing, an Aug 13 press release about the REIT’s 1HFY2024 results, the REIT’s 1HFY2024 financial statement and a spokesperson for the REIT — was only completed on July 10.
In the six months since Rahul Rana took on the top job as the manager of Prime US REIT OXMU , the US office-focused S-REIT has made a series of announcements hinting at a turnaround.
Most recently, the manager entered into a new US$550 million ($717 million) credit facility agreement on Aug 9, set to mature in July 2026 with a one-year extension option.
According to Rana, the overall cost of borrowings at the current benchmark rate will be “below 5%” this year. “And next year, it will be at [the] 5% handle,” says Rana to The Edge Singapore. As at Aug 13, US$330 million of borrowings remain hedged till mid-2026 via interest rate swaps.
A month prior, the manager’s “strategic sale” of One Town Center, a 10-storey office building in Florida, helped provide “immediate additional liquidity”. Together with the new credit facility, the divestment also helped lower the REIT’s pro-forma aggregate leverage to 46.4% from 48.9% previously.
The sale price of US$82 million was below its US$84.8 million valuation as at Dec 31, 2023. The manager had acquired the property in 2021 for US$99.5 million.
See also: Prime US REIT announces sale of asset and refinancing of US$550 million
Still, the refinancing and divestment are no mean feats when viewed in the context of the challenged US office sector. According to Rana, it took management seven months to convince four US banks to offer the credit facility. “You have to really sit down with [the] banks and explain to them that [in order] to give you a fresh credit facility for three years, that there is good safety of equity value below them.”
Onshore US banks understand US real estate, he adds.
According to Rana, the divestment was a “pre-emptive” move, and the manager is currently not hard-pressed to sell any other assets. “[One Town Center] I sold pre-emptively knowing where the market is going. We made this decision to sell; it was a little crystal ball [gazing].”
See also: Prime US REIT secures one-year extension for US$72.15 mil facility
‘Number one in America’
Prime US REIT’s portfolio — along with the wider US office sector — has suffered from falling valuations. At the end of 2022, Prime US REIT’s portfolio of 14 assets was valued at $1.54 billion. At end-2023, this was 8.7% lower at $1.41 billion. Prime US REIT’s portfolio value after the July 10 divestment is $1.34 billion.
Pressured by rate hikes and widening cap rates, “big names” in the office sector are handing their assets back to lenders instead of finding a solution, says Rana. “Is Prime handing [assets] back [to banks]? No. In fact, we are getting them refinanced; you see the difference. Because they’re so massive, they can ignore office [assets] and get into industrial [assets] and data centres; they’re in the business of running funds.”
“True developers” like SL Green and RXR Realty are “quality” players, he adds, “but they will not be in our submarkets because they are in Manhattan”. “They are the big boys of Manhattan; they [have] billion-dollar assets. But in our $100-$200 million assets [range], we are number one in America.”
‘Sentiment-driven’
See also: Tenant improvements sink US office S-REITs but the trough is nigh
Rana assumed the role of CEO of the manager on March 31, succeeding Harmeet Singh Bedi. Rana is a shareholder of KBS Asia Partners (KAP), which is the sponsor of Prime US REIT. KAP holds 40% of the shares of the manager.
For 1HFY2024 ended June 30, the REIT reported gross revenue of US$73.5 million and net property income (NPI) of US$40.6 million, down 7.5% and 14% y-o-y respectively. Distributable income (DI) fell 20.1% y-o-y to US$23.3 million, while distributable income per unit fell to 1.78 US cents from 2.24 US cents the year prior. The 1HFY2023 figure was adjusted to reflect a wider unit base this year, after the manager issued one bonus unit for every 10 existing units on March 28.
The manager also announced a distribution per unit of 0.18 US cents, equating to 10% of 1HFY2024 DI. While this is down 92% y-o-y, the payout stands in stark contrast to peers Manulife US REIT (MUST) BTOU and Keppel Pacific Oak US REIT (KORE) CMOU , which have halted distributions.
Prime US REIT was listed on the Singapore Exchange S68 in July 2019, after MUST debuted in May 2016 and KORE in November 2017. All three have seen their unit prices plummet over the past five years, at between 68% and 89%.
“Look, it’s just not easy to understand what’s going on. So, it’s my job to bring some facts,” says Rana. “I’m a big asset liability management person. My liabilities are two components: the bank financing, refinancing and all that; and then there’s equity below. Frankly, the equity is a little dislocated; it’s flying on its own. I’m like: ‘Come back here.’ I want it to be aligned. That’s what I’m trying to do.”
The equity piece — or trading of Prime US REIT’s units — is “sentiment-driven”, says Rana. “Many people were right to sell given the headwinds that were coming; I have no problem with that. But where we [are] today is what I’m trying to [explain] — where we are today and where we are headed.”
The FTSE Nareit US Real Estate Index has rebounded, but why have the trio of US office S-REITs not done the same?
Stocks in Singapore have “very little liquidity” relative to the US stocks, says Rana, and the buying base of US REITs is “10,000 times” greater. “So, when your stock is illiquid and there’s a negative sentiment, people start selling. When there’s no liquidity, the gaps are massive… [Even] when the news turns good or there’s a turnaround, it doesn’t gap up that quickly.”
Unitholders need to take a longer-term view, says Rana. “What I mean by that is [to] be patient for a couple of years, because the stock price is at, in my mind, depressed levels.”
Photos: Albert Chua/The Edge Singapore
