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Analysts cut Prime US REIT's TP following 1QFY2023 results

DBS Group Research analysts have slashed their target price to 33 US cents from 63 US cents previously.

Analysts have cut their target prices for Prime US REIT (PRIME) OXMU following the release of its results for 1QFY2023 ended March.

In a May 11 note, DBS Group Research analysts Rachel Tan and Derek Tan maintain “buy” on Prime with a slashed target price of 33 US cents (43.94 cents) from 63 US cents previously. “We cut our FY2023-FY2024 distribution per unit (DPU) estimates by 21% and 28% respectively, to factor in higher base fees paid in cash, lower occupancy and higher costs.”

“Prime’s share price is currently trading at 0.3x price-to-net asset value (P/NAV), below the March 2020 pandemic low, and offers an FY2023 yield of 20% after the deep cut in estimates,” note the DBS analysts. “At the current price level, we believe the headwinds are largely priced-in and the stock is at an interesting level to monitor for any potential short-term inflection in macroeconomic sentiment/outlook, especially now that we are closer to the end of the Fed rate hike cycle.”

Prime’s gearing increased by 1.6 percentage points (ppts) to 43.7% at the end of the quarter. “Management continues to focus on leasing with a focus on maintaining positive net effective rent reversions and capital management by monitoring bank debt markets and rate environment,” note the DBS analysts.

Portfolio occupancy is relatively stable at 88.6%, down 0.5 ppt q-o-q. Leasing volumes for the quarter slowed 55% q-o-q to 64,400 sq ft, of which 58% were new leases; but ticked up in April with some 38,000 sq ft in lease signings, though this was after 1QFY2023.

Meanwhile, RHB Bank Singapore analyst Vijay Natarajan is maintaining “buy” on Prime with a lower target price of 57 US cents from 67 US cents previously.

1QFY2023’s distributable income was down 22.5% on a like-for-like basis, mainly on increases in financing costs (40% of the decline), absence of WeWork termination income (30%) and higher opex (21%), says Natarajan in a May 11 note.

Prime will also be electing 100% of management fees in cash this year, compared to 20% in cash since listing — to reduce potential dilution effects. “We cut FY2023-FY2024 DPUs by 12% and 14% by revising fees fully in cash, and tweaking occupancy and financing costs. Our cost of equity is also adjusted higher by 70 basis points (bps), factoring in the severe debt crunch in the US commercial market,” adds Natarajan.

Negative reversions of -2.6% were mainly due to two renewals with minimal tenant incentives, excluding which reversions stood at +3.2%. “Sodexo (5% of income), anchor tenant at One Washingtonian Centre, is expected to vacate 165,000 sq ft of 191,000 sq ft occupied at the building by December 2023 — the balance were subleases, which Prime expects to take over.”

Prime is in the process of extending its main facility of US$400 million, or 60% of the total and currently due in July, by one year till 2024 by paying a 10 bps extension fee. “The REIT reiterated that this extension is fully at its option and expects to complete the process by June. Besides this, subsequent loan expiries are in 2026 and 2029.”

Natarajan believes a refinancing is likely after considering its two strong sponsor support, and their banking relationships and stable operational metrics. “Additionally, Prime has also put in place longer duration hedges that extend until July 2026, which offer protection even if interest costs increase significantly post the refinancing in FY2024.”

As at 11.55am, units in Prime are trading flat at 20 US cents.

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