The woes hitting US real estate are yet again keenly felt by REIT investors here. Prime US REIT OXMU , the latest to report its FY2023 numbers, is planning a bonus issue but the market is clearly more concerned with the lower distributions and the overall weakness of this sector.
Nonetheless, some analysts are still keeping their “buy” calls on Prime US REIT after its portfolio valuation fell 8.7% y-o-y as at the end of 2023 and distribution per unit (DPU) more than halved y-o-y for FY2023 ended Dec 31, 2023.
On Feb 22, the manager of the US office S-REIT posted FY2023 DPU of 2.71 US cents (3.6 cents), 58.6% lower than the 6.55 US cents paid out for FY2022.
For the 2HFY2023, the REIT manager has decided to pay a cash distribution of 0.25 US cents, equivalent to about 10% of its total distributable income for the half-year, in a bid to conserve capital for capex needs, plus the 1-for-10 bonus issue.
DBS Group Research is the biggest bear among broking houses here, staying “fully valued” on the REIT with an unchanged target price of 7 US cents. The target price is around half of Prime US REIT’s unit price as at Feb 26, representing a 50% downside.
“Prime has adopted a different capital preservation strategy compared to its peers,” note DBS Group Research analysts Rachel Tan and Derek Tan in a Feb 23 note. “While it has not suspended distributions, the bonus issue will result in a lower per unit distribution, all else constant.”
See also: Prime US REIT reports 2HFY2023 cash DPU of 0.25 US cents and 1-for-10 bonus issue
The DBS analysts had earlier downgraded Prime US REIT and slashed their target price from 18 US cents in a Feb 16 note, released a week before Prime US REIT reported its results.
DBS had taken a “pre-emptive stance” before Prime US REIT’s results release, citing the “potential domino effect” from its peer Keppel Pacific Oak REIT.
The three US office S-REITs have had to reckon with valuation pressures and falling occupancy, albeit in different ways.
After breaching certain loan covenants, Manulife US REIT announced in August 2023 that it will suspend distributions from 1HFY2023.
Keppel Pacific Oak US REIT announced on Feb 15 that it will do the same despite its gearing staying within requirements, at 43.2%.
With Prime US REIT’s FY2023 results now out, the DBS analysts warn about the REIT’s US$600 million debt facility, which is expiring in July.
The REIT’s gearing, at 48.4%, is “a little too high for comfort”, says DBS, despite remaining below the Monetary Authority of Singapore’s (MAS) limit of 50%.
The DBS analysts “continue to watch for re-rating catalysts”, such as stronger signs of a recovery in the US office market, the US Fed pausing or cutting interest rates and an improvement in macroeconomic sentiment and outlook.
Awaiting successful loan refinancing
Meanwhile, RHB Bank Singapore analyst Vijay Natarajan is more optimistic, staying “buy” on Prime US REIT but with a lower target price of 23 US cents, down from 35 US cents previously. This includes a 2% ESG premium based on RHB’s proprietary methodology.
For more stories about where money flows, click here for Capital Section
“While Prime US REIT’s underlying distributable income for 2HFY2023 slightly exceeded expectations, 90% of it will be retained for capex and liquidity management. It also announced a surprise 1-for-10 bonus unit issue to reward shareholders,” writes Natarajan in a Feb 23 note.
“Notably, its portfolio value decline did not result in breaches against the gearing and financial covenants, alleviating market concerns,” he adds.
According to the RHB analyst, the next key catalyst will be the successful refinancing of the US$600 million loan. This comes amid broad concerns over banks retreating from US office loans.
“Management sounded cautiously optimistic on negotiations with its lender Bank of America, as well as with other regional banks. Prime also has US$166 million of undrawn credit lines that it can tap on, and 62% of its loans are hedged until mid-2026, which can buffer against significant finance cost increases,” says Natarajan.
Prime US REIT’s portfolio occupancy rate is expected to dip but should stabilise at around 80% in FY2024, says Natarajan, citing “signs of a pick-up” in leasing activity across its assets.
Sodexo, which contributes some 4% of Prime US REIT’s income, exited One Washingtonian Center in January, and some of this space had been earlier backfilled by a healthcare tenant.
Prime is also in active talks with a “large tenant”, which could lead to a major boost in this asset’s occupancy rate, Natarajan adds.
Leasing activity saw a “healthy pick-up” in 4QFY2023, says Natarajan, with some 304,000 sq ft of space signed up, higher than the entire 9M2023 lease take-up.
Nearly half of the demand in 4QFY2023 came from new and expansion leases, which the analyst calls “a positive sign”.
Rental reversion for 4QFY2023 came in higher at +9.6%, contributing to a full-year average of +5.8% for FY2023. Prime US REIT’s overall in-place portfolio rental is still some 6.5% below asking rates.
No breach
Likewise, PhillipCapital Research analyst Darren Chan notes that Prime US REIT has not breached any gearing limits, but refinancing risks persist.
In a Feb 26 note, Chan maintains “buy” on Prime US REIT with a lower target price of 30 US cents, down from 37 US cents previously.
Prime US REIT is now focusing on deleveraging and has set a target to execute US$100 million of deleveraging in 2024, notes Chan.
Management has also not committed to future distributions going forward and will evaluate the situation “dynamically”, depending on capital requirements, says Chan. “Management continues to prioritise net effective rents with lower capex deals over headline rents in a challenging US office environment.”
In addition, Prime US Reit has no exposure to WeWork, which filed for Chapter 11 bankruptcy. Chan lowered his FY2024 DPU estimates by 77% after factoring in the enlarged share base from the bonus issue.
“Assuming a 25% payout ratio in FY2024, the current share price implies an FY2024 DPU yield of 8%.” Finally, UOB Kay Hian Research analyst Jonathan Koh has the most upbeat note among his peers, keeping “buy” on Prime US REIT with a lower target price of 45 US cents, down from 57 US cents previously.
In a Feb 26 note, Koh says valuation is “attractive” with distribution yield at 20% for 2024 and 42% for 2025.
