• Keep BUY and USD0.23 TP, 47% upside. Prime US REIT’s 3Q operational numbers were in line but distributable income was slightly below. We recently visited three of its assets in California. Key takeaways being management’s pursuit for all-out leasing efforts that are slowly starting to bear fruit although the lead time remains long. Demand for high quality office space is steadily improving with an acceleration of flight to quality trend. Key risk remains inflation resurgence and interest rate volatility which could drag the anticipated US office market valuation recovery to 2026.

• US election outcome a net positive for office demand but offset by likely delay in interest rate cuts. Managements views the recent election result as a net positive for US office market demand – Donald Trump’s tax cut proposals and policies are centred on creating more manufacturing jobs in the US, which in turn will likely spur employment for sectors such as R&D and production, as well as sales-related roles. Also, tariffs could prompt more multinational corporations (MNCs)to onshore jobs. The downside, however, is that a stronger economy could result in a persistent inflation and slower trajectory of interest rate decline. This could result in a delayed recovery for DPU and office sector valuations.

• Good leasing momentum with occupancy improvement expected in the coming quarters. PRIME signed ~210k sq ft of leases in 3Q, >2x that ofin 2Q. Portfolio occupancy, however, slightly dipped to 83% as new lease signings were offset by tenant movement in some of its assets. Still, we believe PRIME is at near-trough portfolio occupancy levels with ongoing discussion on four large leases (c.60-100k sq ft), of which two are likely to materialise by early next year, bringing portfolio occupancy to >85% (from 83% currently).Rental reversion was +6.5% for the new leases signed during the quarter, with most leases having built-in annual rent escalations of 2-4%.

• PRIME has completed refinancing of USD550m of loans, and as such, has no debt maturing until Jul 2027 (including extension options). Average interest cost post-refinancing is expected at c.5%. We anticipate year-end valuation to range from 0% to -5%, which should keep gearing below the 50% level.

• Waterfront at Washingtonian’s asset enhancement was completed in October, with the modernisation of tenant lounges, conference centre and full-service gyms. Occupancy increased 7ppts to c.40%, with another c.35k sqft of lease expected to be signed in 4Q, taking occupancy to 50%. PRIME is in active discussion with a large tenant, which, if signed, could stabilise the asset with ~80% occupancy.

• We slightly lower our FY24F-25F NPI margin due to lower recovery income, resulting in a c.5% lower distributable income and expect a 10% dividend payout. Our TP is pegged to 0.4x FY24F P/BV and includes a 2% ESG premium.

Source: RHB Securities Research - 18 Nov 2024