DBS Group Research on Thursday (Aug 10) downgraded Prime US Reit : OXMU 0% to “hold” from “buy” while cutting its target price by 45 per cent to US$0.18 from US$0.33.

The new target price, which takes into account potential further declines in net asset value (NAV), comes amid concerns over the real estate investment trust’s (Reit) high gearing and its declining occupancy.

Prime US Reit’s gearing level stood at 42.8 per cent as at Jun 30, 2023, with S$231.6 million in debt headroom to the leverage limit of 50 per cent, based on financial results released on Tuesday.

The research team believes that there is also a limited buffer before the Reit’s gearing hits the 45 per cent level. It is worried that a buffer accounting for only a 5 per cent decline in asset valuation before gearing reaches the 45 per cent level is “insufficient to comfort investors”.

Although the Reit’s extension of debt expiry by one year to 2024 gives it more time to “ride out the interest rate hike cycle”, refinancing risks could remain in the same year if the credit crunch goes on longer than expected, particularly in the US office sector.

Any deterioration in portfolio occupancy will also elevate potential risks to the asset valuation, DBS said. It noted that occupancy seems to be on a declining trend, which could weigh on portfolio performance if “backfilling” takes longer than expected.

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The Reit’s leased occupancy stood at 85.6 per cent as at end June, with a weighted average lease expiry of 3.9 years. Leasing at four of its assets rose during the year, with gradual increases in physical occupancy as several large employers issue re-entry guidelines.

“We remain hopeful that green shoots of increasing leasing discussions could see a turnaround in the US office outlook,” said DBS analysts Rachel Tan and Derek Tan.

Their target price assumes a price-to-NAV ratio of 0.3 times, assuming NAV declines by another 10 per cent. It also implies a downside of about 9.4 per cent from Prime US Reit’s last trading price of S$0.197 as at 3.39 pm. Its units were trading 4.8 per cent or S$0.009 higher at the time.

On Aug 8, Prime US Reit posted a 30.1 per cent fall in distribution per unit to US$0.0246 for the first half ended Jun 30, from US$0.0352 in the same period last year. Revenue, meanwhile was down 2.9 per cent to US$79.6 million, while net property income slipped 7.2 per cent to S$47.2 million.