PRIME US REIT (SGX:OXMU)
Prime US REIT - Towards Normalisation
- Prime US REIT (SGX:OXMU)'s 1Q21 NPI and distributable income met 23% of our FY21e estimates. Portfolio occupancy dipped 0.7% to 91.7%.
- 99% rent collection with minimal lease expiries of 8%/8.4% in FY21e/FY22e, evenly spread across properties. Leasing pick-up expected with greater return to offices.
- Downgrade to ACCUMULATE from BUY as recent improvements of Prime US REIT share price have likely priced in some positives. DDM target price of US$0.94 for Prime US REIT (COE 9.5%) unchanged.
The Positives
1Q21 largely in line.
- Although COVID-19 cases in the U.S. hit new highs in January, Prime US REIT’s income was resilient. Rent collection remained strong at 99% with minimal rent concessions.
- Gross revenue and net property income were steady y-o-y. Property expenses increased 11.7% y-o-y due to a full quarter’s share of Park Tower’s expenses, acquired on 24 Feb 2020.
High renewals; minimal FY21 expiries.
- In 1Q21, Prime US REIT signed 57,647 sq ft of leases at positive rental reversions of 9.5%. More than 80% were renewals or for expansion by existing tenants. Leases were signed with Extend Health, CBRE and FLS Transportation, among others. Prime US REIT also signed 22,437 sq ft of short-term extensions.
- Leases due to expire in FY21 account for only 8% of cash rental income (CRI). These expiries are well spread across its properties with none above 1.4%.
- Month-to-month leases constitute only 0.7% of CRI.
The Negative
Portfolio occupancy dipped 0.7% to 91.7%.
- Several properties’ occupancy dipped q-o-q. The more notable declines were at 222 Main in Salt Lake City and Promenade I & II in San Antonio. 222 Main’s occupancy fell 3% to 90.9%. That of Promenade I & II retreated 3.6% to 93.9%. The main reason was a few tenants left the buildings. January’s COVID-19 spike halted leasing in those markets. As such, portfolio occupancy eased 0.7% to 91.7%. Still, this was well above the Class A office average of 84.3%.
Outlook
Leasing to pick up with greater return to offices.
- Widespread COVID-19 vaccinations have resulted in a swifter return to offices than originally expected. According to a JLL Global Real Estate Perspective survey in May 2021, most companies across the trade sectors that Prime US REIT is exposed to are expecting at least 80% of their workforce to return gradually to the office from 2H21. Hybrid working could be the norm in the near term for major companies, especially in the financial and technology sectors.
- Come mid-2022, office employment is expected to match the pre-pandemic peak, as the U.S. is estimating the creation of 2.3mn office-using jobs over the next two years. Goldman Sachs, Prime US REIT’s second-biggest tenant, has pushed for employees to return to the office by 14 July.
- Prime US REIT detects a pick-up in leasing in Denver and Atlanta. We expect its portfolio occupancy to improve closer to stabilised levels of 94-95% by 1H22.
Looking out for acquisition opportunities.
- There have been more interesting deals in the acquisition market of late, particularly for Class A office assets in urban centres. With low gearing of 33.8% and debt headroom of US$290mn to a 45% gearing, Prime US REIT should be in a position to take advantage of opportunities.
Downgrade to ACCUMULATE with unchanged DDM target price of US$0.94.
- Current Prime US REIT share price translates to an FY21e distribution yield of 8.7% for total potential upside of 19.3%.
- Prime US REIT's share price has appreciated 7% in the past three months, potentially pricing in some of its positives.
- See
Tan Jie Hui
Phillip Securities Research
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https://www.stocksbnb.com/
2021-05-20
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