RHB Group Research’s Vijay Natarajan has maintained his “buy” call on Prime US REIT with an unchanged target price of US$1.02 ($1.38) after the brokerage hosted an investor’s session with the REIT.
In his report dated March 30, Natarajan reveals key discussion points at the session covered the continued leasing momentum, the impact of rising interest rates, acquisition plans, and return-to-office trends.
From the meeting, he says that with Singapore office REITs rebounding strongly at above 10% year-to-date (y-t-d), he believes US office S-REITs – which have been laggards – may enjoy a similar rerating, adding that valuations are “undemanding”, standing at 0.9x P/BV with a 9% yield.
Natarajan observes that office leasing momentum remains strong, with active lease signings seen in its 1QFY2022 ended March 31 despite the impact of Omicron infections.
More specifically for the US, office leasing volumes across the US have turned around since the second half of 2021, with Prime seeing a doubling of leasing volume h-o-h in 2HFY2021 ended Dec 31. New leases accounted for about 21% of leases signed last year.
Another factor in favour of Prime, Natarajan says, is the office supply in its sub-market, which remains relatively limited. For FY2022, about 11% of its leases by income are due for renewal.
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Notably, he highlights that a tenant at Reston Square, Virginia (Whitney, Bradley & Brown, which makes up about 2.6% of income) will be leaving in end-2QFY2022 after being acquired.
With leasing activity expected to pick up further in 2HFY2021, he expects its portfolio occupancy rate to improve slightly by end-2022.
Furthermore, he forecasts that positive rental reversions will continue, as blended in-place rental rates are still 7.3% below asking rates.
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This is coupled with an increasingly optimistic outlook from industry consultants, with mid-single-digit rental reversions expected.
“For FY2021, rent reversions stood at +14%, which should contribute positively in FY2022,” Natarajan thinks. “In addition, 99% of its leases have built-in rent escalations of about 2%.”
For investors who are worried about rising interest rates, the analyst points out that a high proportion of Prime’s debt is hedged, with 87% of Prime’s debt is hedged.
As such, he says the impact on distribution per unit DPU from a 1% increase in interest rates is minimal, estimating it to be lower than a 0.1 cent drop, or 1% lower.
Additionally, Prime also has extension options for its existing debt which, if exercised by paying a slight upfront cost, would extend its weighted average debt maturity to 3.7 years, compared to 3.1 years without extension.
Natarajan highlights that only 2% of debt is expiring in FY2022 and, if extension options are exercised, there will be no debt maturing until 2024.
Moving forward, he thinks that the REIT’s healthy balance sheet presents room for acquisitions, especially from tier-2 growth cities, where it still sees increasing demand from companies.
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This is on the back of a growing educated workforce and growing demand for lifestyle amenities.
“We believe acquisitions to the tune of US$100-200 million are likely in 2H22, with the REITs modest gearing of 37.9% providing some leverage to increase its debt mix. With cap rates in its current and target markets ranging 5.5-7%, we believe there is still good potential for yield-accretive acquisitions,” he says.
At 12.41pm, shares of Prime US REIT are trading at 75.5 US cents, with a FY2022 return on average equity of 7.1% and dividend growth rate of 3.2%
