Prime US REIT has cleared the first major hurdle in its turnaround bid, says RHB Bank Singapore analyst Vijay Natarajan, with the divestment of One Town Center (OTC) in Boca Raton, Florida, albeit at a slight discount to valuation.
This is a positive step, says Natarajan in a May 21 note, as it will lower gearing and provide additional capital buffers against further asset value declines.
Natarajan is keeping “buy” on the US office-focused REIT, with an unchanged target price of 23 US cents (31.05 cents), which represents an 82% upside. The fair value includes a 2% ESG premium, based on RHB’s proprietary methodology.
The REIT sold the property for US$82 million, excluding sellers’ credit of US$4 million, a 3% discount to the end-2023 valuation of US$84.8 million and an 18% discount to its purchase price of US$100 million from July 2021.
The divestment is set for completion by July with the proceeds used to repay debts. While OTC is one of Prime US REIT OXMU ’s core and better-performing assets, contributing 6% of total asset value and with near-full occupancy, the divestment is crucial and timely, says Natarajan.
The divestment would help lower gearing 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, which are estimated at some US$25 million for FY2024, says Natarajan.
See also: Prime US REIT to divest asset at below valuation as it focuses on reducing leverage
“With this divestment, we believe Prime US REIT 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 FY2023 net asset value (NAV) and distributable income,” he adds.
Refinancing debt
The refinancing of Prime US REIT’s July debt is in advanced stages, with management remaining confident of extending it before maturity, says Natarajan.
See also: CEO of Prime US REIT's manager resigns, Board announces replacement
The REIT has US$480 million of debt, or 64% of total loan book, due for refinancing in July, of which US$330 million have hedges in place until June 2026.
For FY2024, RHB has assumed 5% overall financing costs, up from FY2023’s 4%.
Natarajan notes that Prime US REIT’s leasing enquiries are 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”.
“US office leasing enquiries have been picking up, although conversion rates remain slow,” he notes.
Prime US REIT’s portfolio occupancy (ex-OWC) for 1QFY2024 ended March 31 dipped slightly to 84.7% from 85.4% as at end-2023.
Asset enhancements are planned for OWC, with an estimated US$6 million capex, which saw the exit of major tenant Sodexo at the start of 2024.
Overall rent reversions were a slight negative for 1QFY2024 at -1.8% and is set to be around these levels for the full year, with a focus on net effective rents and longer leases, says Natarajan.
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Trimming forecasts
Natarajan has trimmed his FY2024-FY2026 distributable income forecast 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.
The former CEO of Prime US REIT’s manager, Harmeet Singh Bedi, announced his resignation in March and left at the end of that month. The new CEO is Rahul Rana, a shareholder of KBS Asia Partners, which is the sponsor of Prime US REIT, and holds 40% of the shares of the manager.
As at 4.13pm, units in Prime US REIT are trading 0.2 US cents lower, or 1.59% down, at 12.4 US cents.
