• Keep BUY and USD0.23 TP, 25% upside. Prime US REIT’s 1H24 results were in line. Operationally, the REIT had a commendable year so far, delivering on its two key priorities of loan refinancing and deleveraging via asset sale. Portfolio occupancy (2Q24) dipped slightly QoQ but guided encouraging prospective leasing signs with the US office market showing increasing signs of bottoming. The stock has surged 40% over the last month but is still trading at 0.3x PB and we see further room for recovery with a rate cut on the cards.

• Successfully refinanced USD550m loans, comprising a USD400m term loan and a USD150m revolving credit – removing a key overhang. The loans will be extended for an initial term of two years (until July 2026), with an additional one-year extension option, leaving it with no refinancing needs until mid-2027. As the REIT has USD330m of existing debt hedges in place (until July 2026), c.67% of its debt will remain hedged. Post refinancing, we expect overall borrowing cost at c.5% for FY24F and c.5.5% for FY25F.

• Portfolio occupancy (2Q) of 83.9% (-0.8 ppt QoQ), excluding the Washingtonian Center, which is undergoing asset enhancements. Leasing momentum has picked up with leasing volume for 2Q/1H increasing 46%/105% YoY. Notably, 59% of the leases signed in 2Q were new leases (1Q:49%). Occupancy improvements (2Q) came from Reston Square (61%, +14.1ppt) and 171 7th Street (73.5%, +2.5ppt) while decline was seen at Promenade I & II (85.7%, -6.3ppt). Prime is in late-stage negotiation with a large tenant at Park Tower that could improve asset occupancy to c.90% from 68% at present. Rent reversions (2Q) stood at -1.3% (1Q: -1.8%).

• Adjusted gearing of 46.4%, post the completion of One Town Center divestments which was completed in 10 Jul 2024. The asset was sold for USD82m, c.3% discount to Dec-2023 valuation of USD84.8m. We expect Prime’s interest coverage ratio (ICR) to be at c.2.5x for FY24F – still within maximum allowable gearing limit of 50%. With increased market odds of at least two US Federal Reserve rate cuts by end-2024, we believe further cap rate expansions are unlikely. Hence, we expect its overall asset value to remain stable during year-end valuation, with a recovery seen in FY25F.

• 1H24 DPU of USD0.18 with a 10% dividend pay-out ratio similar to 2H23. Distributable income (1H24) declined 20% YoY to USD23.3m, in line with expectations. The retained distributable income will be used for capex and to repay debt. We expect the REIT to maintain a similar 10% payout ratio for 2H24 and restore to 90% payout in FY25F. No changes to our earnings estimates. It has an ESG score of 3.2, resulting in a 2% ESG premium.

Source: RHB Research - 14 Aug 2024