Maybank Kim Eng (MBKE) head of REITs research Chua Su Tye has issued a “buy” call on Prime US REIT due to stable occupancies and strong leasing momentum at 8.9% rent reversion despite weakened market demand. The SGX-listed REIT owns a diversified portfolio of US office real estate consisting of 12 properties across 9 cities including Atlanta, San Francisco and Washington DC.
“PRIME continued to deliver ahead of its IPO projection in 3Q20… Distribution per unit (DPU) visibility into FY21 remains high, supported by a 4.6-year WALE, strong tenancies, and 2.0% per annum growth from its well-placed assets, currently under-rented by 6.7%,” Chua writes in a broker’s report on Nov 6. He maintains his 12-month target price of US$1.10 ($1.48). Leasing momentum grew 56.8% q-o-q in 3Q2020; 60% of leases come from renewals or expansion by existing tenants in established and technology industries.
The counter continues to enjoy near perfect rent collection figures, with 3Q2020 seeing a 99% collection rate despite minor lease deferrals at 0.5% of its cash rental income (CRI). Portfolio occupancy has also remained stable at a healthy 92.9% in 3Q2020 relative to 93% in 2Q2020 despite a slight dip in renewals at its Tower 909 property in Texas. There is also the potential for positive rental reversions; market rents are now 7.5% above expiring rents in 2020.
Value investors will appreciate the diversified portfolio and low concentration of PRIME REIT. Visible distribution per unit (DPU) growth is also expected to be +8% FY2020 DPU yield, with 99.8% of leases having built-in rental escalations averaging 2%. Most properties are also located in cities that have favourable office demand and supply dynamics, ensuring a steady demand for office spaces that PRIME can capitalise on.
“Its balance sheet remains strong with leverage at 32.7%, and suggests US$324 million in debt headroom (at 45% limit). PRIME continues to place well against its US office S-REIT peers on operational metrics and capital management, with low near-term leasing and refinancing risks,” says Chua of PRIME REIT.
90% of the REIT’s debt is locked in at fixed rates, with refinancing only due from 2022. It also compares well against US office S-REIT peers in terms of operating metrics and capital management, with low near-term leasing and refinancing risks. The counter’s gearing ratio now stands at 33%.
In addition to PRIME’s strong balance sheet, the REIT’s sponsor also has an additional US$11.6 billion that could be injected into the REIT for third-party acquisitions. It also possesses both expertise and deep networks in the US that could smoothen the process. But despite PRIME’s strong financial position, future sizable acquisitions may require equity fund raising. It acquires assets based on their property yield, tenants and occupancy, location, and AEI upside.
“We expect average occupancy of 97.6-98.5% for FY2019-FY2020, up from 96.7% at end-Jan 2019. We forecast passing-rent growth of 1.8-3.0% for FY2020,” predicts Chua. He warns however, that spikes in interest rates and value-destroying acquisitions could take a toll on earnings. Changes in the US tax regime in the wake of a potential “blue wave” election result in January, moreover, could weaken the counter’s tax-efficient structure.
As of 11.05am, PRIME US REIT is trading 3.27% higher at US$0.79. It has a price-to-earnings (P/E) ratio of 8.98 and an 8.92% forward dividend yield.
