Brokers’ take: UOB Kay Hian initiates coverage on Prime US Reit with ‘buy’ call, US$0.78 target price

UOB Kay Hian (UOBKH) initiated coverage on Prime US Reit : OXMU 0% with a “buy” call and a target price of US$0.78, representing an 88 per cent upside from the real estate investment trust’s (Reit) last closing price of US$0.415 on Tuesday (Jan 17).

In a report on Wednesday, analyst Jonathan Koh noted that the Reit has seen a price correction of about 40 per cent over the second half of 2022. “We are of the view that the selling is overdone and current weakness presents a good opportunity to accumulate the stock,” he said. 

Based on the research house’s estimates, Prime US Reit currently has “bombed-out valuations” and is “oversold” at a price to net asset value multiple of 0.56 times with a FY2023 distribution yield of 15.2 per cent and yield spread of 11.7 per cent. 

Noting that the Reit has generated positive rental reversion consecutively for the past 10 quarters, Koh believes the Reit will be able to continue doing so due to its lower-than-asking passing rent in the fourth quarter. 

“Within its portfolio, Park Tower at Sacramento, Sorrento Towers at San Diego, Crosspoint at Philadelphia and Tower 909 at Irving have the potential to provide strong positive rental reversion of 11.2 per cent, 21.3 per cent, 17.7 per cent and 13 per cent, respectively, in Q4 FY2022,” he added.  

Additionally, the analyst sees the Reit’s Class A offices as beneficiaries of a “flight to quality despite the gloom in the US office market”. 

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Koh likes Prime US Reit for its portfolio’s blue chip tenants such as Goldman Sachs and Sodexo, which rank among the Reit’s top 10 tenants and are noted to have strong credit standing. He views the 4.6 years weighted average lease expiry for its top 10 tenants as “healthy”. 

“Some 73 per cent of tenants are in the established and growth sectors”, he noted, referring to areas which include science, technology, media and information sectors.

Fluctuating US interest rates are also unlikely to pose much risk to the Reit, the analyst said, as about 83 per cent of the Reit’s borrowings have been “prudently” fixed or hedged to fix rates.

While UOBKH projects the Reit’s capitalisation rate to increase by 50 basis points to 6.8 per cent due higher interest rates, the brokerage believes the resultant fall in aggregate leverage will lead to a “manageable” rise in gearing. 

“We estimate a US$124.8 million drop in the fair value of investment properties, which causes aggregate leverage to deteriorate by 3.4 percentage points to 42.1 per cent but is well within the regulatory limit of 50 per cent,” he added. 

As at 10.25am on Wednesday, units of Prime US Reit were trading at 0.42, an increase of 1.2 per cent.