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


Prime US REIT - Weak Parking Income Masks Strong Leasing

High DPU visibility, undemanding valuations

  • 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.

Stable occupancy, set to rise

  • 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.

Positive leasing momentum, rental reversion trend

  • 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.

Sound balance sheet, upside from acquisitions

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