Prime US REIT - Maybank Kim Eng 2021-11-05: Strong Leasing And Reversions

PRIME US REIT (SGX:OXMU)

Prime US REIT - Strong Leasing And Reversions

Prime US REIT (SGX:OXMU)’s distributable income rose 11.3% y-o-y/12.1% q-o-q in 3Q21, driven by the Sorrento Towers and One Town Center acquisitions. While occupancy was lower, leasing volumes jumped > 250% q-o-q at a strong +19.2% rental reversion.
Prime US REIT's DPU visibility has improved from a 4.5-year WALE (versus 4.1 years in 2Q21), and 2.0% p.a. growth from its AUM, currently under-rented by 7.5%.

We see better fundamentals as physical occupancy recovers in FY22, with catalysts from improving leasing momentum, and upside from acquisitions.
Prime US REIT's valuations are compelling at 8+% FY22 DPU yield, and 30+% upside to our US$1.10 DDM-based target price (COE: 8.2%, LTG: 2.0%).

Prime US REIT's portfolio occupancy was lower at 91.4% (from 91.7% in 2Q21) despite the higher occupancies at Sorrento Towers (at 98.1%) and One Town Center (94.7%), both added in Jul, as occupancies fell at Park Tower (92.4% to 88.3%), and One Washingtonian Center (95.6% to 80.6%).
Vacancy rose at the latter from a single pre-term, with fees to cushion income to Nov 2022. The asset is well placed, and management sees potential for incremental revenue contribution.
Improving leasing activity, up 7.8% q-o-q, with > 40% from leases extending over 10 years, should support backfilling efforts.

Prime US REIT leased ~187k sf in 3Q21 at +19.2% rental reversion, up from ~52k sf in 2Q21 at +10.5%, and ~80k sf in 1Q21 at +8.5%. Most were renewals, while 17.5% were from new leases. Half of leasing activity was attributed to AGG (at 3.0% of cash rental income), as it extended its lease at 171 17th Street till 2035, at +25% reversion, but downsized its footprint from ~122k sf to ~98k sf.
Expiring leases in 4Q/FY22 are low at ~2-10% with nine (of 14) properties at sub-1%. With in-place rents at Reston Square 14.7% above passing rents, negative rental reversions for its 2.6% expiries are likely.

Prime US REIT's gearing rose to 38.4% (from 34.4% at end-Jun 2021), on AUM growth of ~17% to US$1.7b on the back of recent deals. We see a US$383m debt headroom (at 50% 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/ 2021-11-05

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