• Keep BUY and USD0.23 TP, 65% upside. Prime US REIT announced that it is in the final documentation stages of its major loan refinancing with a positive outcome expected by end August. A successful refinancing, along with recent asset divestment and likelihood of interest rate cuts, puts the REIT well back on a recovery path after navigating the challenging market conditions of the last three years. With PRIME still trading at 0.25x FY24F P/BV, we believe the recent share price recovery has further legs.

• PRIME is in the final legal documentation stages of refinancing its USD600m loan, with three of four lenders in the latter syndicated loan agreeing to close – the last has requested for additional time to finalise internal documentation. In this regard, all four agreed to amend the maturity date of the current facility to 19 Aug (from Jul 2024) to facilitate this request. The loan refinancing has been a key share price overhang amid broad market concerns over bank lenders retreating from US office exposure. While we expect headline interest costs for refinanced loans to be much higher at c.7.5- 8.5% on margin spread requirement increases for US office assets, PRIME has in place interest rate swap hedges for USD330m (or c.70% of the USD480m drawn down loan) that extends until Jul 2026. We believe this helps mitigate the overall cost of newly refinanced loans to c.6%. We have assumed overall financing costs for FY24 to be at c.5% (FY23: 4%), increasing to c.5.5% for FY25F-26F.

• Tail-end of asset devaluation cycle, positive divestment of One Town Center. The divestment to Miles Capital was completed last week. The asset was sold for USD82m or a c.3% discount to Dec 2023’s valuation of USD84.8m. The move will lower pro-forma gearing to 45.8% from 48.4%. With increased market odds of two US federal funds rate cuts by end 2024, we believe further cap rate expansions (if any) are likely to be small and will depend on sub-markets. Hence, we expect PRIME’s overall asset value to bottom out by end FY24 and expect a small recovery in FY25. We believe the latest divestment, coupled with likely retention of distributable income, should help bring gearing to a comfortable below 45% level by year’s end.

• Active leading interest across various key assets with a potential for large lease signing (c.100,000sq ft) at Park Tower, which could substantially boost occupancy. Ongoing asset enhancements at One Washingtonian Center (estimated capex: USD6m) could significantly boost leasing prospects considering its superior location surrounded by amenities.

• No changes to our earning and TP, which is pegged at 0.4x FY24F book value. We expect PRIME to distribute only 10% of its income for FY24 – similar to 2H23. An ESG score of 3.2 (out of 4.0) results in a 2% ESG premium.

Source: RHB Research - 17 Jul 2024