Prime US REIT - DBS Research 2021-08-05: On The Verge Of A Turning Point

PRIME US REIT (SGX:OXMU)

Prime US REIT - On The Verge Of A Turning Point

Prime US REIT's 1H21 results in line although there was a decline y-o-y; new acquisitions to kick-in in 2H21.
Key positives:
1. occupancies have held stable,
2. leasing is progressively returning to normal, and
3. strong positive reversion of ~11%.
Key negative: existing vacancies are yet to be backfilled.
Good sign – one key tenant forward has renewed lease by 11 years, with strong positive reversions.

Prime US REIT (SGX:OXMU)'s 1H21 results were in line although they saw a y-o-y decline; contributions from recent acquisition of two properties will kick in 2H21. 1H21 DPU fell 5.4% q-o-q to US$0.0333, in line with our estimates, possibly due to a decline in occupancies. 2Q21 estimated DPU fell 4% y-o-y to US$0.0167 but was relatively flat q-o-q.
1H21 revenue +1% y-o-y to US$72m led by contributions from newly acquired Park Tower but NPI fell 2.3% y-o-y to US$46m
Gearing inched up marginally q-o-q to 34.4% vs 33.8% in 1Q21. Average cost of debt was flat q-o-q at 2.8%.
NAV remains flat at US$0.86 vs 4Q20.

Prime US REIT's portfolio occupancy held stable q-o-q at 91.7%. Slight decline in occupancy seen in some properties such as Tower 909 (-1.2ppt q-o-q) and 171 17th St (-0.7 ppt q-o-q), offset by higher occupancy at 222 Main (+1.7ppt q-o-q)
Vacancy at Village Center Station 1 has yet to be backfilled, but vacancy remained stable q-o-q at 64.9%
Overall, occupancies in Prime US REIT’s assets have fared better than its respective submarket occupancy except Village Center Station 1 (64.9% vs submarket occupancy of 79.8%), One Washington Center (95.6% vs submarket’s 99.7%), and Park Tower (92.4% vs submarket’s 93.6%)

While leases signed in 2Q21 are muted with 52k sqft signed, Prime US REIT noted significant pick-up in leasing activity in 3Q21 with 120k sqft of renewals completed to-date (which is equivalent to ~50% of remaining lease expiries in 2H21).
Physical occupancies have improved to 25% to 30% in the last 30 days.

Prime US REIT continues to record strong positive rental reversions in 2Q21 and 1H21 of 10.5% and 9.3%, respectively. Excluding short-term leases, rental reversion was 13.3%.
The portfolio rent is still at 6.4% on average – below market rents – with Park Tower, Crosspoint and Tower 909 having the largest positive rent differential, while Reston Square and 171 17th Street have the largest negative rent differential against market rents.
Rent collection was at 99% and minimal deferrals were seen during the quarter.

The declines in NPI and DPU were mainly from occupancy declines and parking revenue that were impacted due to low rates of employees returning to office.
Prime US REIT's management sees positive trends of returning to normalcy going into 3Q21 and expect recovery is well under way. These positive trends include
1. an increase in office tours with reports showing levels close to 80% of pre-COVID),
2. lease terms reverting to normalised terms and tenants signing longer term leases,
3. tenants looking for larger spaces ranging from 15k sqft to 30k sqft, and
4. companies progressing with their return-to-office plans and being more confident in making office space decisions for the longer term.
In July, 1 of Prime US REIT’s top 10 tenants, Arnall Golden Gregory, extended its lease of 122k sqft expiring in 2024 to 11 years, expiring in 2035 for 98k sqft of space. Rental reversions could record more than +25% for the lease.
While recovery may still be a little volatile going into 2H21, management remains optimistic that the office market is becoming brighter with contributions from the new acquisitions.

We maintain our BUY rating on Prime US REIT and target price of USS$1.00. We raised our FY21F-FY22F DPU by ~4% to factor in the recent acquisition of Sorrento Towers and One Town Center. We have also adjusted lower occupancy as per 1H21.
See
While recovery could be volatile going into 2H21, we remain optimistic that Prime US REIT will be able to ride on the return-to-office trend in the US especially with a pick-up in vaccination rates in the US.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-08-05

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