Prime US REIT - Phillip Securities 2022-09-14: Resilient Portfolio

PRIME US REIT (SGX:OXMU)

Prime US REIT - Resilient Portfolio

Resilient portfolio with 8 consecutive quarters of positive rental reversions. Leases signed in 2Q22 enjoyed positive rental reversions of +10.9%.
Minimally impacted by rising interest rates, with 86% of debt either on fixed rate or hedged through interest rate swaps. Around 51% of debts have hedges in place through to 2026.

Maintain BUY rating on Prime US REIT (SGX:OXMU) with DDM-based target price lowered from US$1 to US$0.88 as we trim our FY22e- FY24e DPU forecast by 1- 2%. Our COE nudged up from 9.6% to 10.55% on higher risk-free rate assumption and market risk.
Prime US REIT is our top pick in the US office sector for greater tenant exposure to STEM/TAMI sectors. Catalysts include improved leasing and a greater return to office. The current Prime US REIT's Share Price implies FY22e and FY23e DPU yield of 11.4 and 11.6% respectively.

Prime US REIT signed 85.7k sq ft, or 1.8%, of portfolio CRI in 2Q22, with an overall rental reversion of +10.9%; 47% of which were new leases. 2Q22 leasing activities were mainly from financial, professional services and healthcare sectors.
Management guided that leasing demand and enquiries for its assets remain strong and active leasing discussions are ongoing for Tower 1 at Emeryville, Village Center Station 1, Tower 909, 222 Main and 171 17th Street.

Prime US REIT has a diversified portfolio, with no single primary market contributing more than 11.7% of CRI and no single property contributing more than 13.8% of CRI. Portfolio occupancy remained stable in 2Q22 at 89.6%.
Prime US REIT also has a healthy WALE of 4 years, with well staggered lease expirations. Their tenant industry sector diversification also contributes to their resiliency, with 74% of tenants in established and growth STEM/TEMI sectors. (STEM: Science, Technology, Engineering and Math; TAMI: Technology, Advertising, Media and Information)

Minimally impacted by rising interest rates, as ~86% of Prime US REIT's debt is either on fixed rate or hedged through interest rate swaps. About 51% of debts have hedges in place through to 2026, while ~18% of debts are hedged for the next 2 years. About 17% of debt is on fixed rate and matures in 2029. No debt expiring until 2024, assuming the exercise of extension options.
Prime US REIT has aggregate leverage of 37.8%. According to our calculations, every 100 basis points increase in interest rates would affect FY22e DPU by ~1.1%.

As of June 2022, office-using employment increased by about 1.6 million (+4.8% y-o-y), and there were 1.06 million (+3.2%) more office-using workers than before the pandemic began. The US job market remain healthy and this has spurred many companies to add office space to house a larger workforce.
Leasing activity picked up in 1H22 with stronger demand coming from the financial, professional services and healthcare sectors. Physical occupancy across the portfolio is at ~50% as more tenants implement their return-to-work plans. With in-place rents ~5.3% below asking rents, Prime US REIT’s portfolio is primed for more positive rental reversions.

Our DDM-based target price for Prime US REIT is lowered from US$1 to US$0.88 as we trim our FY22e- FY24e DPU forecast by 1- 2%. Our COE nudged up from 9.6% to 10.55% on higher risk-free rate assumption and market risk.
The current Prime US REIT's share price implies FY22e and FY23e DPU yield of 11.4 and 11.6% respectively.
Prime US REIT is our top pick in the US office sector for greater tenant exposure to STEM/TAMI sectors and the resiliency of its portfolio. Catalysts include improved leasing and a greater return to the office.
Prime US REIT's share price is also trading at an attractive 25% discount to book.
See

Darren Chan Phillip Securities Research | https://www.stocksbnb.com/ 2022-09-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 DOWN 1.000