Brokers’ take: Analysts lower Prime US Reit’s target price, expect earnings to stabilise

ANALYSTS have lowered their target prices for Prime US Reit amid a fluctuation in occupancy and higher management fees paid in cash. 

DBS Group Research reduced the real estate investment trust’s (Reit) target price to US$0.33 from US$0.63, while RHB lowered it to US$0.57 from US$0.67. 

Both brokerages on Thursday (May 11) maintained “buy” calls on the counter.

DBS analysts noted that Prime US Reit’s estimated headline distribution per unit for Q1 fell 30 per cent year on year to US$0.0125, below the brokerage’s estimates. 

This was largely due to the Reit raising management fees paid in cash to 100 per cent, from 20 per cent previously, they said. 

The Reit reported a fall in portfolio occupancy to 88.6 per cent, from 89.1 per cent the previous quarter, and negative rental reversions of 2.6 per cent. 

Though occupancy is likely to have slight fluctuations due to tenant movements, RHB analyst Vijay Natarajan expects it to remain above 85 per cent with slight positive rental reversions. 

He also noted that the Reit has no refinancing due until 2024 and remains well within its loan covenant.  

DBS believes Prime US Reit has a well-diversified portfolio of Class A US office assets. The brokerage noted that it is set to benefit from “return-to-office trends in the US”, although recovery might be rocky. 

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The Reit on Wednesday posted a 22.5 per cent fall in distributable income to US$14.9 million for the first quarter of 2023, from US$19.2 million the previous year.

Despite the potential impact of inflation and higher interest costs on earnings, DBS noted that these headwinds are expected. It anticipates earnings to stabilise from its FY2023 forecasts. 

The brokerage added that the Reit currently trades at 0.3 times its net asset value – below the pandemic trough in March 2020 – and offers a forecast FY2023 yield of 20 per cent. 

“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 inflexion in macroeconomic sentiment,” said DBS analysts. 

Units of Prime US Reit were trading US$0.005 or 2.4 per cent higher at US$0.21 as at 10.32 am on Friday.