On Feb 8, Prime US REIT, which owns a portfolio of US offices, reported that DPU for 2HFY2022 ended Dec 2022 was down 12.2% y-oy to 3.03 cents. This brings the full year distribution down by 3.4% to 6.55 cents per unit.

“However, rent reversions remained strong, with occupancy showing signs of stabilising,” writes RHB analyst Vijay Natarajan in his Feb 9 note, where he has kept his “buy” call but with a lowered target price of 67 US cents, from 77 US cents.

“We expect share price reaction to the results to be neutral, as the negatives are mostly priced in,” he adds.

“Gearing remains within regulatory limits, and its relatively well-hedged debt position shields from rate hikes,” adds Natarajan.

For the current FY2023 and coming FY2024, the analyst has trimmed his DPU estimates by 13% and 12% respectively, to take into account adjusted occupancy and financing costs.

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Over the past couple of months, Prime US REIT’s share price dropped to as low as 37 US cents, as investors got jittery over lower demand for US office space as workers chose to stay home even though the worst of the pandemic is no longer. As some companies reduced their physical space to cope with this trend, office landlords suffered from lower revaluation of their properties.

While many workers prefer to work from home, there are some signs of change. UOB Kay Hian's Jonathan Koh notes that return-to-office physical occupancy reached a new high and surpassed 50% for first time since start of the pandemic.

Koh, who has a "buy" call on the stock, notes that many companies are requiring workers to be back 3 to 4 days a week with some even requiring them to be back full-time.

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He also points out that the REIT has managed to pull off its 11th consecutive quarter of positive rental reversion, with lease for 142,800 sq ft signed in 4QFY2022 and rental version of 20.2%.

Nonetheless, to take into account narrower net property income margin of 61%, versus 62% in the preceding 1HFY2022, Koh has trimmed his DPU forecast for the current FY2023 by 3%.

He notes that Prime US REIT is still providing a “lucrative” yield of 12.5% and that the stock, trading at a mere 0.65x price to net asset value, is deemed “oversold”.

Koh's target price of 76 US cents, trimmed slightly from 78 US cents previously, is pegged to the dividend discount model with a cost of equity of 9% and terminal growth of 1%.

Derek Tan and Rachel Tan of DBS Group Research, on their part, believe that negatives such as inflationary worries and higher interest costs are “largely known” and “expected to stabilize” from the current FY2023 onwards.

“Even though inflation and higher interest costs may impact earnings, we believe these headwinds are largely expected,” note the analysts in their Feb 9 note, where they’ve kept their “buy” call.

“In addition, gearing/capital management remained under control despite a decline in portfolio valuation,” they add.

However, to take into account higher operating costs, they’ve trimmed their target price from 65 US cents to 63 US cents, which implies a yield of 10% and 0.8x P/NAV.

Prime US REIT traded at 48 US cents as at 4.02 pm on Feb 10.

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