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PhillipCapital downgrades Prime US REIT to ‘accumulate’ as it prices in refinancing risk

Felicia Tan
Felicia Tan • 2 min read
PhillipCapital downgrades Prime US REIT to ‘accumulate’ as it prices in refinancing risk
Tower 1 at Emeryville, one of the REIT's properties. Photo: Prime US REIT
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PhillipCapital analyst Darren Chan has downgraded Prime US REIT OXMU -

to “accumulate” even though the REIT’s results for the 1QFY2024 ended March 31 came within his expectations.

For the quarter, Prime US REIT reported a distributable income of US$12.0 million ($16.2 million), 19.5% lower y-o-y due to a drop in portfolio occupancy and higher finance expenses.

Revenue fell by 7.6% y-o-y to US$37.1 million while net property income (NPI) fell by 11.7% y-o-y to US$20.8 million.

The REIT’s revenue and distributable income stood at 23% and 22% of Chan’s full-year estimates, respectively.

In its update, the REIT reported an aggregate leverage of 48.1%. About US$480 million of debt – about 69% of the REIT’s total debt – is due to be paid in July.

At its results call, the REIT manager said that it is confident that it will refinance the amount before then. It adds that the REIT is in the final stages of securing the loan from a syndicate led by the Bank of America.

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“US banks are relatively more comfortable with financing US commercial real estate on a 65% loan-to-valuation (LTV) and an interest coverage ratio (ICR) of 1.5 times,” notes Chan in his May 13 report.

At the same time, the REIT’s assets are still generating income and cash-flows. However, credit spreads and interest cost may widen, he adds.

To this end, Chan has also lowered his target price to 12 US cents from 30 US cents previously.

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“We peg our target price to 0.2 times P/NAV (from [a] dividend discount model or DDM), in line with its peers,” says the analyst.

“We are pricing in the refinancing risk by changing our valuation from DDM to P/NAV that is in-line with US office peers,” he adds.

According to Chan, the move is warranted due to the short two-month window the REIT has to refinance its debt.

“Prime is now focusing on deleveraging and has set a target to execute US$100 million of deleveraging in 2024. A successful refinancing of the US$480 million loan maturing in July we believe will help narrow the discount to NAV to 0.3 times P/NAV and a target price of 18 US cents,” he says.

“Based on our assumption of a 25% payout ratio in FY2024, the current share price implies an FY2024 distribution per unit (DPU) yield of 9.5%. Prime is currently trading at 0.19 times P/NAV,” he adds.

Units in Prime US REIT closed 0.2 US cents lower or 1.80% down at 10.9 US cents on May 13.

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