PRIME US REIT (SGX:OXMU)
Prime US REIT - A Decent Quarter, Valuations Undemanding; Keep BUY
- Prime US REIT (SGX:OXMU) posted decent operational numbers in 1Q which met expectations.
- The stock has underperformed year-to-date which we believe is due to misplaced concerns on a prolonged and deep impact to office assets from work from home impact and recession concerns. While risks have increased on the back of persistent inflation and ongoing war, we believe the valuation of 0.8x P/BV and 10% yield are unjustified.
- Maintain BUY rating on Prime US REIT and US$1.02 target price, 46% upside.
Prime US REIT's 1Q estimated DPU up 8% y-o-y
- Prime US REIT's 1Q22 estimated DPU up 8% y-o-y at 1.79 cents, aided by acquisition contributions, higher parking revenue (+30% y-o-y), rental growth as well as amortisation of lease termination income. 83% of its portfolio debt remains hedged with a 1% increase in interest rates resulting in a minimal ~1.4% impact to DPU.
- The impact of utility charges is expected to be marginal as it is mostly recovered from tenants on a usage basis.
Expect occupancy volatility but leasing momentum remains promising so far.
- Prime US REIT's 1Q22 portfolio occupancy dipped slightly by 0.4ppt q-o-q to 89.9% but management noted it has since improved back to more than 90%, with the signing of new leases in 2Q22. Leasing velocity was strong and broad based in 1Q22 at ~171k sqft of leases signed (41% of FY21) and additional 46k sqft signed in April - despite the Omicron wave - showing healthy demand for its assets. 32% of these leases were new leases, higher than 21% for last year which is another sign of tenants returning to market.
- Notable occupancy drop in the quarter was at Tower 1 at Emeryville (58.9%) where WeWork and another tenant have left the premises. In 2Q another key tenant - Whitney, Bradley & Brown (2.6% of income) - will leave Reston Square after being acquired.
- Management continues to see active interest for vacated spaces in the market and expects overall occupancy to improve by year end barring unforeseen circumstances.
Positive rent growth to continue.
- Prime US REIT's 1Q22 rental reversion stood at 3.4% and - including leases signed in April - stands at +6%. Overall asking rents are still 6% below market terefore full year rent reversion is expected to remain positive in low to mid-single digits.
- Acquisition still on cards although its weak share price may hamper the possibility of equity fund raisings. Prime US REIT's gearing is modest at 39.1%. Cap rates in target markets are still in the range of 5.5% to 7%. We foresee a possibility of US$100-200m of acquisitions in 2H if market conditions stabilise.
- No earnings forecast changes for Prime US REIT. Prime US REIT's ESG score of 3.1 out of 4.0 based on our proprietary in-house methodology. As this score is one notch above our country median score, we applied a 2% premium to our intrinsic value.
- See
Singapore Research
RHB Securities Research
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Shekhar Jaiswal
RHB Invest
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https://www.rhbinvest.com.sg/
2022-05-13
SGX Stock
Analyst Report
1.02
UP
1.02
