Prime US REIT - Maybank Kim Eng 2021-08-04: Weak Parking Income Masks Strong Leasing

PRIME US REIT (SGX:OXMU)

Prime US REIT - Weak Parking Income Masks Strong Leasing

Prime US REIT (SGX:OXMU)’s 1H21 DPU dipped by 5.4% y-o-y and 2.6% h-o-h due to lower parking income (at ~7% of revenue). The decline was in spite of strong leasing, which should improve in 2H as physical occupancy recovers.
Prime US REIT's DPU visibility is high given its 4.1-year WALE, strong tenancies and +2.0% pa growth from its AUM, currently under-rented by 6.4%, now strengthened by its recent deals. We see catalysts from improving leasing momentum, and upside from acquisitions.

Prime US REIT's valuations are compelling at 8+% FY21 DPU yield, and 30+% upside to our US$1.10 DDM-based target price (COE: 8.2%, LTG: 2.0%). BUY.

Prime US REIT's 1H21 revenue rose 1.2% y-o-y but fell 0.4% h-o-h, while NPI dipped 2.3% y-o-y and 2.5% h-o-h as transient parking income fell due to lower physical occupancies.
Portfolio occupancy was stable at 91.7% in 2Q21, and should rise with the addition of Sorrento Towers (95.6% in Jun 2021, now at 98.2%) and One Town Center (at 94.7%). Occupancies for 10 of its 12 assets remain above their respective sub-markets, except for Village Center Station 1 (64.9% versus 79.8%) and One Washingtonian Center (95.6%, and 99.7%). Enquiries are up for larger 15-20k sf leases at the former, and discussions are taking time to finalise.

Prime US REIT leased ~52k sf in 2Q21 at +10.5% rental reversion, versus ~80k sf in 1Q21 at +8.5% (and ~59k sf in 4Q20 at +8.3%). Long-term leases (5-7 years) at +13.3% reversion contributed ~81% of activity, with ~71 of these due to renewals by existing tenants in established and growth-type industries. AGG (at 3.4% of cash rental income) extended its lease in Jul at 171 17th Street till 2035 at a +25% reversion while downsizing its footprint from ~122k sf to ~98k sf, to back ~120k sf in forward leasing in 3Q21 to date.

Prime US REIT's leverage remains low at 34.4% (from 33.8% at end-Mar 2021) but should rise to ~39%, as its AUM increases by ~17% to US$1.7b due to the recent deals. Afterwards, we see a US$190m debt headroom (at 45% limit).
Prime US REIT compares well with its US office S-REIT peers, as it has low near-term leasing and refinancing risks, and we see upside from acquisition opportunities and as it targets FTSE EPRA NAREIT Index inclusion in the medium term.
See

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-08-04

SGX Stock Analyst Report BUY MAINTAIN BUY 1.100 SAME 1.100