SGX stocks are well-known for their generous dividends, but PRIME US REIT takes the cake with a forecasted dividend yield of around 9% by December 2023. Currently trading at just 0.9 times price-to-book (P/B) value, this is a counter that would leave most value investors salivating.
“PRIME US REIT’s operating metrics portfolio remains sturdy, with stable occupancy, a continued positive rent reversion outlook (FY2020: +7.2%), and strong inorganic growth potential on the back of its low gearing. The REIT’s well-diversified asset and tenant mix – with exposure to growth sectors – put it in a strong position to tide through COVID-19,” says RHB Group Research (RHB) analyst Vijay Natarajan.
Already offering a bountiful 8.6% distribution per unit (DPU) for FY2020, the stock has exceeded Natarajan’s forecasts by 3.6%. This was supported by positive rent growth and contributions from its Park Tower property in Sacramento, California. The strong performance has more than offset lower occupancy and car park income, which constitute 5-7% of its total revenue.
SEE: Prime US REIT 2H20 DPU and FY20 DPU outperform IPO forecast by 2.1% and 3.6%
“While the occupancies at Village Center Station I, 171 17th Street, and Park Tower at between 65.1-92.6% were below market at 81.8-94.9%, [PRIME US REIT’s] properties are well-placed, with demand from financial and technology sector tenancies expected to support backfilling efforts in the coming quarters,” remarks Maybank Kim Eng (Maybank KE) analyst Chua Su Tye.
In fact, portfolio occupancy as a whole remained strong at 92.4% in 2H2020 vis-a-vis 92.6$ in 3QFY2020. Rental collections also performed robustly at 99%, with rent deferrals minimal at less than 1%. This was due to other properties in PRIME US REIT’s portfolio picking up the slack - particularly Village Center Station (VCS) II and 222 Main.
Thus, despite the Covid-19 pandemic, the REIT’s 2HFY2020 revenue, net property income and distributable income exceeded IPO projections by 7.4%, 7.8% and 16.1% respectively. For the full financial year, FY2020 estimates were ahead by 6.6%, 7.7% and 15.6% respectively. Overall portfolio value only saw a marginal decline of 0.9%.
Better yet, leasing momentum is picking up as Covid-19 recovery kicks in. PRIME US REIT signed leases for around 6% of its total surface area last year, with 63% signed in 2HFY2020.
FY2020 rent reversions were also healthy at 7.2% due to its underrented portfolio. More than 60% of leases were renewals or expansions by existing tenants in established and technology industries; the remaining 40% of new leases were mainly from the tech sector.
“Key new tenants/renewals include Northwestern Mutual, Towers Watson, and Washington University. Most of the leases signed were for relatively longer terms of 5-7 years, with some of the leases expected to commence in 2022,” remarks Natarajan. While overall physical occupancy remains low at 15-20%, rapid vaccination has seen more return to offices.
FY2021 leasing activity has picked up too, says Chua, with 48,000 square feet being leased out year-to-date. Reversion rates stand at 6.9%, serving to head off expiring leases that are 9% net lettable area and 8.8% cash rental income. VCS I in particular, notes Natarajan, is only 65% occupied now, providing room for occupancy improvements.
“With average portfolio rents still 6.5% below the market , we expect positive rent reversions of 3-5%. In addition, 99.9% of PRIME’s leases have around 2% of in-built rent escalations,” explains the RHB analyst. DPU visibility, remarks Chua, therefore remains high going forward, especially with the counter’s WALE currently standing at 4.4 years overall and 5.2 for its top ten tenants.
For more stories about where the money flows, click here for our Capital section
PRIME US REIT has one of the strongest balance sheets among S-REITs, with a low gearing of 33.5% vis-a-vis 32.7% in end-September last year. It thus enjoys a US$303 million debt headroom for potential acquisitions below the 45% gearing limit. Natarajan of RHB sees it outperforming peer US office S-REITS on operational metrics and capital management, with a potential inclusion on the FTSE EPRA NAREIT Index a potential medium term upside.
“Management sees good opportunities from third-party assets and its sponsor’s portfolio, with a focus on growth markets driven by tech and established sectors, i.e. innovation clusters. We believe it will acquire around US$150-200million worth of accretive assets in 2021,” says Chua of Maybank KE.
As of 2.08pm, PRIME US REIT is trading 0.61% higher at US$0.83.
