Prime US REIT just saw its “best leasing quarter” in 3QFY2021, though portfolio occupancy dipped slightly, notes RHB Group Research analyst Vijay Natarajan.
Leasing activity surged more than three times q-o-q, with leases signed for 4.9% of portfolio net lettable area (NLA). The bulk was from lease renewals with approximately 18% of them being new leases.
Portfolio occupancy slightly dipped to 91.4%, down 0.3ppt q-o-q, mainly due to higher vacancies at One Washingtonian Center and Park Tower.
WeWork, which makes up 2.2% of Prime US REIT’s income, is currently in discussions to pre-terminate their lease at Tower 1 at Emeryville in California. Management is currently drawing down the rent from security package which covers it until November 2022.
See: Prime US REIT in talks with WeWork on resolution of its lease obligation in California
Separately, a tenant occupying 2.6% of NLA at Reston Square in Washington D.C. will not be renewing its lease when it comes due in July 2022. The tenant was acquired by another corporate and will be relocating to the acquirer’s building.
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“A likely outcome in our view is the REIT getting additional compensation for allowing early termination. This could work in REITs advantage with office market expected to improve next year. Another tenant, Whitney, Bradley & Brown, is expected to vacate Reston Square upon lease expiry mid-next year,” writes Natarajan.
In a Nov 8 note, Natarajan is maintaining his “buy” call on Prime US REIT, with a raised target price of US$1.04 from $1.03 previously. This represents an 18% upside.
“3QFY2021 distributable income was inline. Operationally, there were positive takeaways with leasing momentum gathering pace and rents holding up well across markets though occupancy is expected to remain slightly volatile,” writes Natarajan.
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During the quarter, Prime US REIT added two “good quality assets” to its portfolio, which Natarajan thinks should contribute positively. “Prime remains our Top Pick among US office REITs with an attractive yield,” he adds.
Prime US REIT is a diversified S-REIT with a focus on stabilised income-producing office assets in the US. Prime has a portfolio of 14 prime and freehold office properties, strategically located in 10 US markets.
3QFY2021 distributable income increased 11.3% y-o-y, translating to a distribution per unit (DPU) of 1.73 US cents, based on an enlarged share base. The higher DPU was mainly due to acquisitions while distributable income for existing assets remained steady q-o-q.
Rent collection remains solid at 99.7% with minimal concessions, notes Natarajan. Management noted that ancillary income, such as carpark charges, which accounted for approximately 8% of total pre-Covid-19, is currently at 65-75% of normal levels.
In addition, rent reversions are on an uptrend, with a “strong” 19.2% positive reversions for leases signed during the quarter, notes Natarajan. This indicates that office rents are holding up fairly well despite the Covid-19 situation, he adds.
“About 12% of leases are due for renewal until 2022 across various assets and, as in place rents are still 7.5% below asking rents, we expect positive mid-single digit rent reversions for next year,” adds Natarajan.
Gearing remains comfortable at 38.4% after the recent acquisitions and fund raising. “There is sufficient debt head room for accretive acquisition of one or two assets (US$100-200 million), which we believe is likely to happen in the next 12 months,” he writes.
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Meanwhile, PhillipCapital Research analyst Natalie Ong thinks a “more significant” return to the office is likely to happen in 1Q2022.
Physical occupancy for 3QFY2021 was approximately 30%, an improvement from some 20% in 2QFY2021. While many surveyed corporates expressed interest in returning to the office in 3QFY2021, new waves of the virus delayed return-to-office plans.
“We expect significant return-to-office will likely happen in 1QFY2022, delaying a more meaningful recovery in carpark income,” writes Ong.
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In a Nov 9 note, Ong is maintaining “accumulate” on Prime US REIT, with a target price of 94 US cents.
“Passing rents for 10 out of 14 of Prime’s assets are currently below market rents, implying the potential for positive reversion averaging 7.5% for the portfolio. The is because growth in market rents has outpaced the scheduled escalations embedded in Prime’s leases,” she adds.
As at 1,13pm, units in Prime US REIT are trading 5.5 US cents lower, or 6.25% down, at 82.5 US cents.
Photo: Prime US REIT
