RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call on Prime US REIT OXMU after the REIT announced that it is in the final documentation stages of the refinancing of its US$600 million ($804.79 million) loan.
A positive outcome is to be expected by end-August, says the analyst in his July 16 note.
This comes alongside the REIT’s recent asset divestment and likelihood of interest rate cuts, which puts it on a recovery path following challenging market conditions of the last three years, in the analyst’s view.
With Prime US REIT currently trading at 0.25 times FY2024 P/BV, Natarajan believes the REIT’s recent share price recovery to have “further legs”. The REIT was trading at 14 US cents per unit as at Natarajan’s report.
The progress of the REIT’s final legal documentation stages of its refinancing is underway, with three of four lenders in the latter syndicated loan agreeing to close – the last lender has requested for additional time to finalise internal documentation.
In facilitating this request, all four have agreed to amend the maturity date of the current facility to Aug 19 from July previously.
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The analyst notes that the REIT’s 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 7.5%-8.5% on margin spread requirement increases for US office assets, Prime US REIT has in place interest rate swap hedges for US$330 million that extends until July 2026,” writes Natarajan.
In the analyst’s view, this will help to mitigate overall costs of newly refinanced loans to around 6%, with the assumption that overall financing costs for FY2024 are standing at 5%.
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An increase from 4% in FY2023, he believes overall financing costs will subsequently increase to around 5.5% for FY2025 - FY2026.
Additionally, Natarajan notes that the REIT’s divestment to Miles Capital was completed as of last week.
The asset was sold for US$82 million, at a 3% discount to the valuation of US$84.8 million, as at December 2023.
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,” adds the analyst.
As such, the REIT’s overall asset value is set to bottom out by end FY2024 followed by a small recovery in FY2025, as per the analyst’s expectations.
Natarajan believes the latest divestment, coupled with likely retention of distributable income, should help bring gearing to a comfortable below 45% level by year’s end.
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He adds that the REIT is also experiencing active leading interest across various key assets, alongside the potential large lease signing at Park Tower, which could subsequently boost occupancy.
Meanwhile, ongoing asset enhancements at One Washingtonian Center, with an estimated capital expenditure of US$6 million, could significantly boost the REIT’s leasing prospects given its superior location surrounded by amenities.
Natarajan’s unchanged target price of 23 US cents is pegged at 0.4 times FY2024 book value.
For FY2024, he expects Prime US REIT to distribute 10% of its income, similar to 2HFY2023.
Prime US REIT’s environmental, social and governance (ESG) score sits at 3.2 (out of four). As per RHB’s in-house proprietary ESG methodology, the analyst’s target price includes a 2% discount to the REIT’s intrinsic value.
As at 3.55pm, shares in Prime US REIT are trading at 2.4 US cents higher or 16.9% up at 16.6 US cents.
