Proceeds will be used to fund capital expenditure, tenant incentives, leasing costs to attract, to retain tenants, and to meet existing tenant obligations. At the same time, gearing will be held below 46% while strengthening the balance sheet.
"We view the private placement positively," writes Chan in his Sept 29 note.
"The capital raised is crucial for activating signed leases and supporting upcoming leasing commitments, paving the way for sustainable higher payouts. In addition to the additional capital, the REIT is seeing operational improvements," he adds.
The REIT is in advanced talks to lease out 150,000 sqft of space, equivalent to 3.5% of its NLA, which will lift its portfolio occupancy to 85% by end of the year, up from 80.2% in 1HFY2025.
See also: OCBC's Lee maintains $54 fair value on DBS
In addition, Chan anticipates a slight portfolio valuation uplift at year-end, driven by the signing of new leases. At this level, Prime US REIT is still trading at 0.37x its book value.
With new leases signed, the REIT's weighted average lease expiry has been extended to 4.7 years, up from 4.3 years in 1QFY2025.
In another positive indication, the REIT, with 10.5% of occupancy starting to commence its cash contribution from 3QFY2025 onwards, the REIT will have sufficient cash flow visibility to sustain the higher payout ratio going forward.
See also: CGS International maintains 'add' on Seatrium following US$475 mil order cancellation by Maersk
As such, Prime US REIT will raise its distribution from 10% in 1HFY2025 to at least 50% for the current 2HFY2025. It has been withholding distributable income to cover ongoing capital and operational needs.
Based on this new ratio, Chan has raised his FY2025 distribution per unit forecast from 0.26 US cents to 0.62 US cents.
He has also lowered his cost of equity from 14.9% to 10.5%, given signs of recovery in the US office market and cash flow visibility from new leases signed in FY2024 and 1HFY2025.
All in, Chan has derived a higher target price of 30 US cents, from 21 US cents.
As at 11.05 am, Prime US REIT units changed hands at 20 US cents, unchanged for the day and up 17.65% year to date.
