• Maintain BUY and USD0.23 TP, 82% upside. Prime US REIT’s divestment of One Town Center (OTC) is a positive step, in our view, even though it is being sold at slight discount to valuation. The move will lower gearing and provide additional capital buffer against further asset value declines. US office leasing enquiries have been picking up, although conversion rates remain slow. Key catalyst ahead would be the successful refinancing of upcoming loan maturities, for which PRIME is in the final stages of negotiations.

• The divestment of OTC in Boca Raton, Florida, to Miles Capital for a sale price of USD82m (excluding sellers’ credit of USD4m) is a c.3% discount to end-Dec 2023 valuation of USD84.8m and c.18% discount to its purchase price (Jul 2021) of USD100m. The divestment is set for completion by July with the proceeds used to repay debts. While OTC is one of PRIME’s core and better-performing assets (6% of total asset value) with near-full occupancy, the divestment is crucial and timely, in our view, helping to address gearing concerns that will be reduced to 45.8% from 48.4% as at end 2023. The proceeds, coupled with expected retention of upcoming distributable incomes, should help bring down gearing to below 45% and meet capex needs (estimated at c.USD25m for FY24). With this divestment, we believe PRIME can adopt a wait-and-watch approach before considering more asset sales to maximise asset values. This divestment will result in a 2% reduction to pro- forma FY23 net asset value or NAV and distributable income.

• The refinancing of Jul 2024 debt is in advanced stages, with management remaining confident of extending it before maturity. PRIME has USD480m of debt (64% of total) due for refinancing in July, of which USD 330m has hedges in place until Jun 2026 – these should mitigate the impact on financing costs. For FY24, we have assumed c.5% overall financing costs, up from FY23’s 4%.

• Leasing enquiries still healthy, with more interest seen at key assets Park Tower, Tower 1 at Emeryville, One Washingtonian Center (OWC), and 101 South Hanley, albeit with relatively longer lead times. 1Q portfolio occupancy (ex-OWC) dipped slightly to 84.7% from 85.4% as at end 2023. Asset enhancements are planned for OWC (estimated capex: USD6m), which saw the exit of major tenant Sodexo at the start of 2024. Overall rent reversions were a slight negative (-1.8%) for 1Q and is set to be around these levels for the full year, with a focus on net effective rents and longer leases.

• We have revised lower our FY24F-26F distributable income by 10-13%, factoring in divestments and higher financing costs, and only expecting a 10% dividend payout this year with the balance used to fund capex. Our TP is pegged at 0.4x FY24F book value. With a 3.2 ESG score vs the 3.1 country median, we ascribe a 2% ESG premium to PRIME’s intrinsic value.

Source: RHB Research - 23 May 2024