Introduction

Prime US REIT, a key player in the real estate sector, has been making strategic moves to navigate the complexities of the market. This article delves deep into the company’s performance and strategic initiatives, offering a comprehensive look at its operations and future prospects.

Company Overview

Prime US REIT (PRIME SP) is a real estate investment trust that invests in stabilized income-producing office assets across the United States. With a high-quality portfolio of 13 Class A freehold office properties, strategically located in 12 key office markets, the company’s assets were valued at US\$1.3 billion as of June 2024.

3Q24 Performance: Navigating Transitional Challenges

The third quarter of 2024 was marked by transitional downtime for Prime US REIT. The company’s results were impacted by lower occupancy at the Waterfront at Washingtonian and a changeover of tenants at 101 South Hanley. Despite these challenges, PRIME maintained a positive leasing momentum with potential new tenants at key locations, including Waterfront at Washingtonian and Park Tower. The company has also bolstered its balance sheet post-refinancing and by divesting One Town Center.

Financial Analysis

PRIME’s financial standing is highlighted by attractive distribution yields of 2.7% for 2025 and 30.3% for 2026, with a price-to-net asset value (P/NAV) of 0.28x. Gross revenue and net property income (NPI) experienced a decline of 15% and 23% year-on-year, respectively, primarily due to lower occupancy rates and tenant transitions.

Despite these dips, PRIME achieved a positive rental reversion of +6.5% for new and renewed leases in 3Q24. The leasing volume more than doubled quarter-on-quarter to 209,800 square feet, showcasing strong momentum. Excluding the Waterfront at Washingtonian, the portfolio occupancy remained stable at 83%.

Strategic Initiatives and Market Positioning

PRIME’s strategy to focus on Class A office buildings is yielding benefits as they attract tenants seeking high-quality assets in prime locations. The company has completed asset enhancements at the Waterfront at Washingtonian, increasing occupancy by 7 percentage points to 40%, with further improvements expected by the end of 2024. Notable leasing discussions at Park Tower in Sacramento and Village Center Station 1 in Denver could further enhance occupancy rates.

Balance Sheet and Earnings Outlook

PRIME has strengthened its balance sheet with a new credit facility of up to US\$550 million and by divesting One Town Center for US\$82 million. This has improved its aggregate leverage and increased cash reserves. The company expects new leases to contribute significantly from the second half of 2025, with a revised distribution per unit (DPU) forecast reduced by 10% for 2025 and 9% for 2026.

Valuation and Recommendation

Prime US REIT is recommended as a ‘BUY’ with a target price of US\$0.36, based on a discounted dividend model (DDM) with a cost of equity of 11.0% and terminal growth of 0.5%. The company’s strategic asset management, coupled with favorable market dynamics, positions it well for future growth.

Conclusion

Prime US REIT’s strategic initiatives and robust asset management practices are set to navigate the company through transitional challenges and capitalize on market opportunities. With a focus on Class A office assets and strong leasing momentum, PRIME is well-positioned to deliver value to its stakeholders.