Analysts from DBS Group Research, Maybank Kim Eng and RHB Group Research have maintained their “buy” calls on Prime US REIT, while PhillipCapital has kept its “accumulate” recommendation on Prime US REIT despite the lower distribution per unit (DPU) reported for the 1HFY2021 ended June.
During the period, Prime US REIT saw a 5.4% decline in DPU to 3.3 US cents (4.482 cents) from 3.5 US cents previously due to higher property expenses.
To DBS analysts Rachel Tan and Derek Tan, the REIT is currently trading at an 8% yield and 0.9 times price-to-net asset value (P/NAV) for the FY2021, which they deem as “attractive” as interest rates are still at low levels.
“Prime US REIT was the first among its peers to acquire new assets in FY2021 when the situation started to turn for the better; this should provide earnings stability and future growth,” write the analysts in an Aug 5 report.
The REIT was also quick and nimble in leverage on its favourable credit metrics to acquire actively, ahead of its peers, despite the disruption caused by Covid-19 soon after its listing.
“We believe investors will increasingly recognise Prime US REIT as it continues to build a strong track record in generating shareholder value,” they add.
The analysts at DBS have given a target price of US$1 which is based on a risk-free rate of 2.5% and a beta of 0.95 times. The target price also implies a yield of 6.8% and P/NAV of 1.16 times.
See also: Prime US REIT sees 5.4% drop in DPU to 3.3 US cents in 1H2021
They have also raised their DPU estimates for the FY2021 to FY2022 by 4% to factor in the acquisition of Sorrento Towers and One Town Center.
In addition, they have lowered their occupancy rate estimates per the REIT’s results in the 1HFY2021.
However, they caution that a slower-than-expected economic recovery due to the new waves of Covid-19 infections in the US would impact businesses and may cause a risk of vacancies in its business parks and office buildings.
That said, despite the volatile recovery going into the 2HFY2021, the analysts say they remain “optimistic that Prime US REIT will be able to ride on the return-to-office trend in the US especially with a pick-up in vaccination rates in the US,” they write.
Maybank Kim Eng analyst Chua Su Tye has kept his target price of US$1.10.
Like the analysts at DBS, Chua deems the REIT’s valuations as “compelling” with an 8% DPU yield for the FY2021.
Despite the slight decline in DPU for the 1HFY2021, which came in spite of strong leasing, Chua says the REIT’s DPU visibility is high given its weighted average lease expiry (WALE) of 4.1 years, strong tenancies and 2.0% per annum (p.a.) growth from its assets under management (AUM), which is currently under-rented by 6.4%.
“We see catalysts from improving leasing momentum, and upside from acquisitions,” writes Chua in an Aug 4 report.
In addition, Prime US REIT compares well against its US office S-REIT peers. This is due to its “low near-term leasing and refinancing risks,” he says.
The REIT also has a diversified US portfolio and low concentration risk with 12 properties across nine cities.
“We see upside from acquisition opportunities and as it targets FTSE EPRA NAREIT Index inclusion in the medium term,” he adds.
Upside swing factors, according to Chua, are better-than-expected DPUs from estimates, accretive acquisition of new properties, increases in rents, occupancy or property values of its assets.
Conversely, downside risks include spikes in interest rates, value-destroying acquisitions, as well as changes in [the] tax regime that affects its tax-efficient structure.
PhillipCapital analyst Tan Jie Hui has maintained her target price of 94 US cents on the REIT, which translates to distribution yields of 8.1% for the FY2021 for a total potential upside of 22.0%.
The REIT’s DPU stood at 46% of her FY2021 estimates.
She has also lowered her DPU estimates for the FY2021 and FY2022 by 10.5% and 0.7% respectively after accounting for a larger unit base.
“We factor in additional income from its newly acquired properties but lower our rental and occupancy assumptions for FY2021 to capture declines in its carpark income and a softer leasing market,” writes Tan in an Aug 5 report.
While physical occupancy for the REIT has increased to 25% to 30% from 15% to 20% in the last 30 days, Tan notes that leasing remains below pre-pandemic levels and that leasing weakness may persist into the 3QFY2021.
“Although Prime has been discussing leasing with prospective tenants especially in Denver and tours of office space increased over 80% from January to May 2021 according to VTS, actual space commitments usually lag leasing decisions by a few months. This means that committed portfolio occupancy can be expected to bottom out only in 4Q this year,” she writes.
RHB analyst Vijay Natarajan has, too, kept his target price of US$1.03 as Prime US REIT’s DPU fell below expectations at 48% of his FY2021 estimate.
That said, he notes that office tour activity and leasing momentum in Prime US REIT’s assets are starting to pick up pace with more employees expected to return to the office in the 4QFY2021.
He has, however, cut his net profit estimates for the FY2021 by 2% to accommodate the slightly longer leasing times.
He also estimates that the REIT’s occupancy will bottom out in the FY2021, although rental reversions will remain positive.
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Like the previous analysts’ observations, Natarajan also notes that “the recent addition of two quality assets has further diversified and strengthened its income profile”.
“The REIT is also expected to be included in the FTSE/EPRA Nareit index in the September review, which should narrow its trading discount vs peers,” he adds.
As at 4.27pm, units in Prime US REIT are trading flat at 84 US cents or 0.94 times P/B, with a dividend yield of 8.3% for the FY2021, according to RHB’s estimates.
Photo: Prime US REIT
