Analysts from DBS Group Research and RHB Group Research have maintained their “buy” calls on Prime US REIT, but have slashed their target prices on the stock.
DBS analysts Rachel Tan and Derek Tan have cut their target price from 88 US cents ($1.23) to 60 US cents, while RHB’s Vijay Natarajan trimmed his target price from US$1 to 77 US cents.
The DBS analysts explain that the REIT is well positioned to be a key beneficiary of the return-to-office trends in the US, although they add that it will be “a rocky recovery.”
They point at Prime US REIT’s share price, saying that it has fallen almost 50% from the start of the year, even below its pandemic trough in March 2020. However, they believe that most known headwinds for the REIT are priced in, and downside risks could be limited.
Furthermore, its yield remains “attractive”, and the analysts note that Prime US REIT currently trades at a about 13% yield and 0.6x P/NAV, which offers deep value.
On the interest rates front, Prime US REIT’s interest rates are largely hedged or fixed until mid-2024, offering some protection against rising interest rates in the near term despite operating in a “challenging environment”.
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The DBS analysts highlight that the REIT’s hedging ratio stands at 83% as of 3QFY2022 ended 30 Sept, and these expire in mid-FY2024 to FY2029. In addition, 66% of its debt is hedged or fixed through to mid-2026 and beyond.
As such, they think that refinancing risks are largely mitigated, as debt facilities have one to two years of extensions, adding that the next refinancing requirement will be in FY2024.
As for RHB’s Natarajan, he points out that the earnings from the REIT’s 3QFY2022 and 9MFY2022 were in line with his expectations.
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He adds that there are “positive read-throughs”, with a healthy pick-up in office leasing activity Natarajan elaborated that leasing activity was broad-based at eight of its 13 assets in 3QFY2022, and its portfolio occupancy rate, as a result, remained stable q-o-q at 89.6%.
Furthermore, he sees that office rental rates show little signs of slowing down.
Despite the hike in vacancies, there has been little sign of the rental market slowing down, as tenants have been willing to pay more for good-quality premium spaces.
This was reflected in Prime US REIT registering its 10th straight quarter of positive rental reversions, at +10.1% in 3QFY2022, although management noted that tenant incentives have gone up a little.
Natarajan points out, “portfolio average in-place rental rates are still 6.7% below asking rates, and we expect rental reversions to be in the positive mid-single digits in FY2023.”
He highlights that the counter has been oversold along with its peers, and trading close to distressed levels (ie below pandemic levels) – at 0.6x P/BV, amid an overly bearish outlook for the US office sub-sector.
Like the DBS analysts, RHB’s Natarajan also takes comfort in the fact that Prime US REIT has 83% of its debt hedged, and estimates that every 100 basis points (bps) of interest rate increase is expected to decrease distribution per unit (DPU) by about 2%.
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He does cut his FY2022-FY2024 DPU estimates by 1% in FY2022, 4% in FY2023 and 4% in FY2024, lifting his cost of equity (COE) by 175 bps to account for higher interest rates and market risks.
Natarajan concludes, “we expect a cap rate expansion on the back of rising interest rates, but do not anticipate its portfolio value to decline by beyond 10%.”
As at 3.17pm, shares of Prime US REIT were trading at 47 US cents, with a FY2022 P/E ratio of 8%, according to DBS.
