As the vaccine rollout in the US progresses, Prime US REIT is cautiously optimistic on the office sector outlook, says RHB Group Research, as physical offices remain a “key ingredient” for work environments in the US.
RHB Group Research analyst Vijay Natarajan is maintaining “buy” on the REIT, with a target price of US$1.00, which represents a 24% upside.
“We hosted Prime US REIT’s management for a virtual meeting with our regional clients. Management was cautiously optimistic on the US office sector outlook, with the recovery in employment bolstered by the vaccine roll-out and passing of the USD1.9trn economic stimulus package,” writes Natarajan in a March 17 note.
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Natarajan also notes a key downside risk of a continued rise in 10-year treasury yields, which would make the REIT sector relatively unattractive.
Nonetheless, Prime US REIT’s valuation remains undemanding at 0.9x price-to-book value (P/BV), with a FY2021F yield of 8.7%, approximately 300 bps higher than the S-REIT average.
Prime US REIT is a diversified Singapore REIT, with a focus on stabilised income-producing office assets in the US. It offers investors unique exposure to a high-quality portfolio of 12 prime and freehold office properties that are strategically located in ten primary markets in the US, which carry a total appraised value of US$1.4 billion.
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The REIT’s management cited the latest Cushman & Wakefield US office sector outlook report, which expects the US to return to peak office-using employment levels by 1Q2022. “Most surveys show that employees and employers expect to spend 2-3 days in the office post Covid-19, indicating the continued use of a hybrid work model. While the work-from-home trend is expected to result in some rightsizing, management believes that office space continues to be a key ingredient for a collaborative and cooperative work environment,” writes Natarajan.
In addition, leasing momentum has picked up in the US. Prime US REIT signed office leases for approximately 225,222 sq ft, some 6% of its total, in FY2020, despite the challenges related to the pandemic.
The leasing momentum picked up in 2H2020, notes Natarajan, with rental reversions remaining healthy at +7.2%, aided by an under-rented portfolio. “It had a good start to 2021, with about 48,063 sq ft of space signed in new leases in January (+6.9% rental reversion),” he adds.
Approximately 40% of the leases were due to new tenants that are largely from the tech sector, and the balance comprised renewals or expansions, says Natarajan.
Only some 8.8% of leases (excluding January lease signings) are due for renewal in FY2021, and its portfolio’s average rental rate is still 6.5% below the market average, says Natarajan. Also, 99.9% of its leases have an in-built rental rate escalation of about 2%.
Finally, the REIT aims to grow assets under management (AUM) by 20% per annum, with an eye on index inclusion. “The REIT’s net gearing of 33.5% is among the lowest in the sector, with a debt headroom of US$303 million for acquisitions,” notes Natarajan.
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Management has guided for AUM to grow 20% annually, depending on market conditions and the right asset fit, he adds, which translates to asset acquisitions amounting to about US$300 million per annum. “It will continue to focus on non-gateway second-tier markets that benefited from a demand shift due to Covid-19. The REIT is scouring for opportunities from its sponsor portfolio as well as third-party assets, with a focus on growth markets driven by tech and established sectors (innovation clusters).”
Natarajan expects Prime US REIT to acquire one to two assets in 2021 valued between US$100 and US$200 million apiece in 2021. “It is also eyeing an eventual inclusion into the FTSE EPRA NAREIT index, which should result in greater trading liquidity and an improved investor profile – thereby compressing its high trading yield.”
As at 10.40am, units in Prime US REIT are trading 1 US cent lower, or 1.24% down, at 80 US cents.
