PhillipCapital analyst Darren Chan has maintained his “buy” call on Prime US Reit but with a lower target price of 88 US cents ($1.23), down from his previous figure of US$1.
Chan explains that the lower target price was due to a forecasted increase in the cost of equity capital (COE) for the Reit from 9.6% to 10.55%, due to higher risk-free rate assumption and market risk.
Despite this, he sees that Prime is minimally impacted by rising interest rates, with 86% of debt either on fixed rates or hedged through interest rate swaps. According to his calculations, every 100 basis points increase in interest rates would affect FY2022 distribution per unit (DPU) by about 1.1%.
Around 51% of debts have hedges in place through to 2026, and the Reit has no debt expiring till 2024.
Chan also describes the REIT as his “top pick” in the US office sector, due to greater tenant exposure to STEM and TAMI sectors. STEM refers to the science, technology, engineering and mathematics sector, while TAMI refers to the technology, advertising, media and information sector.
He also describes Prime’s portfolio as “resilient”, noting that it has recorded 8 consecutive quarters of positive rental reversions.
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Prime signed 85,700 sq ft, or 1.8%, of its portfolio cash rental income (CRI) in its 2QFY2022 ended June, with an overall rental reversion of +10.9%. 47% of these were from new leases.
2QFY2022 leasing activities were mainly from the 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. Resilient portfolio.
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Prime’s portfolio is also diversified, with no single primary market contributing more than 11.7% of CRI and no single property contributing more than 13.8% of cash rental income (CRI). Portfolio occupancy also remained stable in 2QFY20 22 at 89.6%.
Chan points out that “Prime also has a healthy weight average lease expiry (WALE) of four years, with well-staggered lease expirations. Their tenant industry sector diversification also contributes to their resiliency, with 74% of tenants in established and growth sectors.”
From a macro view, the analyst highlights that office-using employment increased by about 1.6 million ( up 4.8% y-o-y), and there were 1.06 million more office-using workers than before the pandemic began as of June 2022 .
In addition, the US job market remains “healthy” and this has spurred many companies to add office space to house a larger workforce. Leasing activity also picked up in 1H2022 with stronger demand coming from the financial, professional services and healthcare sectors.
For Prime, physical occupancy across the portfolio is at about 50% as more tenants implement their return-to-work plans. Chan thinks that with in-place rents at about 5.3% below asking rents, Prime’s portfolio is primed for more positive rental reversions.
At its current share price, Prime’s DPU stands at 11.4% and 11.6% for FY2022 and FY2023 respectively, with Chan adding that Prime is also trading at an attractive 25% discount to its book value.
As of 10.53 am, shares of Prime are trading at 61.5 US cents, with a FY2022 P/NAV ratio of 0.73x
