PRIME US REIT (SGX:OXMU)
Prime US REIT - Yielding On Rental Reversions
Strong rental reversion with more than 9% yield
- Prime US REIT (SGX:OXMU)’s 1H22 DPU rose 5.7% y-o-y/2.0% h-o-h, driven by contributions from Sorrento Towers and One Town Center, which were acquired in Jul 2021. Occupancy was softer-than-expected in 2Q22, but should see support from improving leasing momentum in 2H22.
- We lowered DPUs forecast for Prime US REIT by 1-2%, and DDM-based target price (COE: 8.3%, LTG: 2.0%) to US$1.05 (from US$1.07).
- Prime US REIT's DPU visibility remains high, underpinned by a 4.0-year WALE, and 2.0% per annual growth from its AUM, currently under-rented by 5.3%. We see better fundamentals as physical occupancy recovers, with catalysts from improving leasing, positive rental reversion, and upside from acquisitions. Stay at BUY.
Lower occupancy, with performance mixed
- Prime US REIT's portfolio occupancy fell to 89.6% in 2Q22 (from 89.9% in 1Q22), with a mixed performance across its properties. Occupancy fell most at 101 South Hanley, Tower 909, and Park Tower from expiring leases, while it climbed at Village Center I, One Washingtonian Center and One Town Center.
- While occupancy for Tower I at Emeryville should climb with WeWork’s space to be partially backfilled by another coworking operator, vacancy will jump at Reston Square as WBB’s lease (2.6% of cash rental income) expired in Jul 2022. We think occupancies will bottom out from end-2022 (vs 1H22).
Positive leasing, +11.2% rental reversion
- Leasing slowed in 2Q22 (to ~86k sf) after it surged in 1Q22, but overall 1H22 (at ~258k sf) jumped 158% y-o-y. Rental reversion was stronger at +11.2% in 2Q22 (vs +3.4% in 1Q22, +14.1% for FY21), and driven by demand from finance, professional services, and healthcare sector tenancies, with new leases contributing 47% (vs 32%).
- Prime US REIT's expiring leases in FY22 are low (at 5.7% of NLA), with 12 (of 14) properties at sub-1%. We see rental growth as in-place rents are 5.3% below market rents.
Balance sheet healthy, upside from potential deals
- Prime US REIT's gearing fell to 37.8% (vs 39.1% as at end-Mar 2022), while borrowing cost rose to 2.8% (from 2.7%). With fixed-rate debt high at 86%, a 50bps rise in interest rate could lower DPUs by < 1%.
- See
- Prime US REIT compares well with its US office S-REIT peers, as it has low near-term leasing and refinancing risks. The consolidation of property management functions to Lincoln Property Group should strengthen its ESG priorities.
- We see upside from deal opportunities, which is backed by a S$417m debt headroom (50% limit).
Chua Su Tye
Maybank Research
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https://www.maybank-ke.com.sg/
2022-08-04
SGX Stock
Analyst Report
1.05
DOWN
1.100
