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

PRIME US REIT (SGX:OXMU)

Prime US REIT - Beat The Odds

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

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.

We maintain our BUY rating on Prime US REIT but lower our Target Price to US$1.00 from US$1.05 previously as we take a slightly prudent outook on the US economy.
Trading at c.8% yield and 0.9x P/NAV, we believe valuations remain attractive as we ride on the positive sentiment of the re-opening of US. In addition, FY20F rental income will be partly supported by maiden contributions in FY20F from newly acquired Park Tower.
See Prime US REIT Share Price; Prime US REIT Target Price; Prime US REIT Analyst Reports; Prime US REIT Dividend History; Prime US REIT Announcements; Prime US REIT Latest News.

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.

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