Prime US REIT - DBS Research 2020-03-26: One Shall Stand

PRIME US REIT (SGX:OXMU) | SGinvestors.io PRIME US REIT (SGX:OXMU)

Prime US REIT - One Shall Stand

  • Key attributes of Prime US REIT (SGX:OXMU)s portfolio - long WALE of 5.1 years, low lease expiries ( < 10% in the next 2 years), high committed occupancy of 96% and no debt refinancing in FY2020/21 - will help to support the stock as it navigates near-term disruptions.
  • With limited lease expiries in FY2020/21, termination rights unlikely to be exercised; expect more tenants to renew their leases in times of uncertainty.
  • Leases are well secured by security deposits and guarantees; O&G tenants leases expiring from 2022- 2024.
  • While valuations look attractive, Prime US REIT's share price could remain volatile as the stock trades in tandem with the US market and sentiment on the US economy.



What’s New

  • Similar to its peers, Prime US REIT (SGX:OXMU) held its update call yesterday to address the market on the impact of COVID-19 in a timely manner just when the US govt has approved the US$2tn stimulus package.
  • To summarise, Prime US REIT’s management believes that there will be market disruptions in the next few months, however, its base case is for the economy to rebound on a very quick V-shaped recovery with the stimulus package.
  • The key attributes of Prime US REIT’s portfolio - long WALE of 5.1 years, low lease expiries ( < 10% in the next 2 years), high committed occupancy of 96% and no debt refinancing in FY2020/21- augurs well as it navigates near-term disruptions.
  • In addition, management expects more tenants to renew their leases in times of uncertainty which bodes well for Prime US REIT.
  • Prime US REIT's share price has fallen by more than half from its peak in Jan2020 and hit its lowest level two days ago. Since then, Prime US REIT's share price has rebounded 21% from the low.


Key Highlights:


Increased cleaning frequency in the office buildings.

  • In response to the COVID-19 outbreak, management has raised cleaning frequency in the buildings.
  • There are currently no tenant defaults and rental rebates are given to F&B tenants which contribute < 1% of total income.
  • KBS’ (Sponsor) portfolio generated good returns during GFC - a testament of a strong team and good quality assets. Based on management’s experience during GFC, occupancies could fall to 80% which is still decent, and rental rates and valuation may fall by 20%. However, KBS’ (sponsor) portfolio continues to generate good returns (c.11% in 3 years) a testament of a strong team and good quality assets.

Limited lease expiries in FY2020-21; termination rights in FY2021 unlikely to be exercised.

  • Prime US REIT has limited lease expiries in the near term with only < 7% and < 10% (estimated post Park Tower acquisition) of cash rental income (CRI) expiring in FY2020 and FY2021 respectively.
  • While there are termination rights on some leases expiring in FY2021, management does not expect to exercise this especially for a lease to a government entity.

Major O&G tenants have lease expiries from 2022 onwards.

  • While mining and O&G tenants contribute some 6.6% of CRI, the major O&G tenants’ leases are only expiring from 2022 onwards with a larger lease only expiring in 2024.
  • Leases are well secured by security deposits / guarantees:
  • WeWork provides corporate guarantees / LCs which covers 2 years of income.
  • Sodexo provides corporate guarantees for all remaining obligations.
  • While there are concerns on the WeWork operations, we understand that WeWork as a tenant will drop off the top 10 tenants list and is estimated to contribute less than 2% of CRI post the acquisition of Park Tower. In addition, WeWork’s lease provides corporate guarantees / LCs which covers 2 years of income.
  • Sodexo, one of the top 10 tenants which contributes c.5% of CRI (estimated post Part Tower acquisition), provides corporate guarantees for all remaining obligations. The lease is expiring in 2023. Management continues to monitor these tenants.

No refinancing risks in FY2020-21; gearing lowest among peers.






Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-03-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.050 SAME 1.050



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