Both PhillipCapital and RHB Bank Singapore analysts have lowered their target prices for Prime US REIT OXMU following its 3QFY2023 ended Sept 30 results, but they have also kept their “buy” calls.
PhillipCapital’s Darren Chan has lowered his price to 37 US cents from 39 US cents previously, while RHB’s Vijay Natarajan has lowered his price to 35 US cents from 40 US cents previously.
The REIT’s 3QFY2023 distributable income of US$14.7 million ($19.93 million), a 23.4% y-o-y decline, was in line with Chan’s expectations, and formed 25% of his FY2023 forecasts.
The analyst says that this was due to the REIT increasing management fees paid in cash from 20% to 100%, higher interest expense, lower portfolio occupancy, and absence of lease termination income. Excluding the change in management fees paid in cash, distributable income is down 16.6% y-o-y, he says.
Chan notes that the REIT’s portfolio occupancy dropped to 85% from 85.6% q-o-q, with overall rental reversions of -2%. He expects a further decline in occupancy going forward as Sodexo, Prime’s second largest tenant (5.3% of income), vacates One Washingtonian Center (OWC).
Sodexo is expected to vacate 166k sq ft of 191k sq ft leased by December 2023, and the balance space is currently sublet to other tenants who will likely remain.
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“Prime is making use of this downtime to re-amenitize OWC, with enhancement initiatives costing about US$5 million underway to modernize the asset to improve leasing interests. Backfilling at this asset is in progress, with encouraging signs as it has already secured a 19k sq ft 11-year lease with a healthcare tenant on October 23,” says Chan.
However, Chan says that the REIT’s leasing activity has picked up this quarter. A total of 145.6K sq ft of leases was signed in 3QFY2023, more than the previous two quarters combined. This is mainly due to the lease extension of top tenant Charter Communications for 94k sq ft at Village Center Station I (VCS I), he notes.
“Management indicated strong leasing momentum at some of its properties, with notable
leasing discussions underway at VCS I and Park Tower, albeit with relatively longer lead times,” says Chan.
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The PhillipCapital analyst has lowered his FY2024 distribution per unit (DPU) estimates by 7% on the back of lower occupancy and higher finance costs assumptions.
“Prime is currently trading at 0.21x p/nav, and we believe that most of the negatives are already priced in,” he says. “The key risk will be on the year-end valuation impact to gearing (43.7%) and bank covenants. There is a refinancing of US$484 million (69% of total) debt under its main credit facility which expires in July 2024. The current share price implies FY2023/FY2024 DPU yield of 30%.”
Likewise, Natarajan of RHB notes that the key uncertainties for the REIT include the extent of year-end valuation decline, in which he has penciled in a about 10% drop, as well as the refinancing of its upcoming 2024 debt.
“Valuations are at distress levels, we see room for upside once these hurdles are cleared,” he says.
His target price comes in at 35 US cents, representing a 118% upside and about 26% yield.
As at 12pm, units in Prime US REIT are trading 0.9 US cents lower or 5.77% down at 15 US cents.
