Prime US REIT - DBS Research 2020-06-23: Beat The Odds


Prime US REIT - Beat The Odds

  • Near-perfection rental collections during lockdown.
  • 100% payout in FY20F on track with healthy collections.
  • Solid credit metrics, well-positioned to capture acquisition opportunities.
  • Maintain BUY on Prime US REIT; lower Target Price marginally to US$1.00.

Prime US REIT – 1Q2020 operational update

Maiden contributions from Park Tower; portfolio remains steady; no refinancing until 2024:

  • Prime US REIT (SGX:OXMU)'s 1Q2020 Distributable Income (DI) is 13% higher than projected mainly due to contributions from the newly acquired Park Tower, lower interest expense and higher rents. Revenue and net property income (NPI) was 4.1% and 6.7% higher vs projection.
  • Based on our calculation, distribution per unit (DPU) is marginally lower compared to projections. See Prime US REIT Dividend History.
  • Prime US REIT's portfolio occupancies remain healthy at 94.9%, 0.9 ppt lower mainly from 222 Main, Salt Lake City (-1.5ppt) and Tower 909, Dallas (-1.5ppt).
  • Weighted average lease expiry (WALE) has increased to 4.9 years vs 4.2 years as at 4Q2019.
  • Lease expiries for FY2020 have been reduced to 5.7% from 6.9% as at 4Q2019.
  • Leases are largely expiring in the latter half of the year. Prime US REIT’s management expects to maintain a high retention ratio of 88% Prime US REIT is already in active negotiations / has renewed c.50% of its 9% leases expiring in FY2021.
  • Gearing remains stable at 33.7% with no refinancing required until 2024. Despite the Monetary Authority of Singapore (MAS) raising the gearing limit to 50%, Prime US REIT’s management expects to maintain gearing below 40% and believes that debt headroom is sufficient to weather the current challenging environment

Prime US REIT – Updates from COVID-19 impact:

Few requests for rental relief; working with WeWork for a resolution; no plans to retain dividend:

  • Rental collections for April are at around 90%. Top 25 tenants have all paid rents except WeWork.
  • So far, there have been a few requests for rental relief from office tenants asking but not in significant numbers. The requests are currently being processed.
  • Among its high-risk tenants, Prime US REIT is current working with its coworking operator tenants, WeWork and Regus, for a resolution. Prime US REIT’s management highlights that it has letters of credit (LCs), corporate guarantees and security bond on WeWork’s rents totalling c.US$2m (approximately 1-year rental based on our estimates).
  • Currently, Prime US REIT’s management does not expect any stress among its O&G tenants. Its largest O&G tenant Apache’s lease will only expire in 2024.
  • Prime US REIT’s management continues to expect tenants to renew their leases rather than move out during this period. Retention is expected to remain high.
  • Acquisitions are currently in a pause mode. However, Prime US REIT continues to look for opportunities during these challenging times.
  • There are no plans to retain dividend payouts at the moment. However, Prime US REIT will re-evaluate the situation again in 2Q2020. The COVID-19 impact is expected to hit the hardest on businesses in May-June 2020.

Maintain BUY but lower Target Price to US$1.00.

Where we differ: Committed to 100% payout; credit metrics favourable to capture acquisition opportunities.

  • During the IPO, Prime US REIT is committed to 100% payout in FY20F and we believe this remains on track as rental collections remain healthy. In addition, Prime US REIT has healthy credit metrics of low gearing (34%) with no refinancing needs until 2024, is well-positioned to capture any acquisition opportunities.

Reports on SGX listed US Office REITs

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.00 DOWN 1.050