With strong rental reversion and more than 9% yield, market pessimism on US office-focused Prime US REIT is “likely overdone”, say analysts.
RHB Group Research analyst Vijay Natarajan is mtaining "buy” on Prime with a lower target price of US$1 ($1.37) from US$1.02 previously. The new target price represents a 39% upside.
Prime US REIT holds a portfolio of 14 US office properties worth US$1.7 billion. On Aug 3, the REIT reported a distribution per unit of 3.52 cents for 1HFY2022 ended June, up 5.7% y-o-y. Net property income in the same period was US$50.8 million, up 9.7% y-o-y; while revenue was up 13.5% y-o-y to US$81.8 million.
In an Aug 8 note, Natarajan notes that 2HFY2022 will be “slightly weaker”. “Prime posted credible 1HFY2022 results, aided by acquisitions and rental growth. Excluding contributions from recent acquisitions, DPU growth would have been flattish. The known exit of Whitney, Bradley & Brown (ninth largest tenant, 2.6% of income) in July and the absence of amortised income from WeWork, leases from November are expected to dent 2HFY2022, until these vacancies are backfilled,” he writes.
On the other hand, Natarajan is impressed by Prime’s leasing demand. “Its assets remain healthy and better than our expectations. About 86% of its debts are hedged, with no debt expiry until 2024 (assuming exercise of debt options) and, as such, should be minimally impacted by rising interest rates.”
‘Under-rented by 5.3%’
See also: Prime US REIT reports 1HFY2022 distribution of 3.52 US cents per unit
Maybank Research analyst Chua Su Tye says Prime’s DPU visibility remains high, underpinned by a 4.0-year weighted average lease expiry (WALE), and 2.0% p.a. growth from its assets under management (AUM), currently under-rented by 5.3%.
In an Aug 4 note, Chua is staying “buy” on Prime with a lower target price of US$1.05 from US$1.07 previously. “We see better fundamentals as physical occupancy recovers, with catalysts from improving leasing, positive rental reversion, and upside from acquisitions.”
Portfolio occupancy fell to 89.6% in 2QFY2022, from 89.9% in 1QFY2022, with a mixed performance across its properties. Chua thinks occupancies will bottom out from end-2022.
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Leasing slowed in 2QFY2022 after it surged in 1QFY2022, but overall 1HFY2022 jumped 158% y-o-y. Rental reversion was stronger at 11.2% growth in 2QFY2022, compared to 3.4% in 1QFY2022 and 14.1% for FY2021), driven by demand from finance, professional services, and healthcare sector tenancies, with new leases contributing 47%.
Chua also points to Prime’s healthy debt headroom of $417 million compared to a 50% limit, as gearing fell to 37.8% from 39.1% as at end-March 2022.
Borrowing costs, meanwhile, rose to 2.8% from 2.7%. “With fixed-rate debt high at 86%, a 50 bps rise in interest rate could lower DPU by less than 1%,” says Chua.
Chua adds: “Prime compares well with its US office S-REIT peers, as it has low near-term leasing and refinancing risks.”
As at 9.44am, units in Prime US REIT are trading 3 US cents lower, or 4.20% down, at 68.5 US cents.
