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Simons Trading Research

Author: simonsg   |   Latest post: Wed, 21 Sep 2022, 11:12 AM

 

Prime US REIT - Market Pessimism Likely Overdone; Stay BUY

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  • We hosted Prime US REIT (SGX:OXMU) for a virtual post-results non-deal roadshow. Investor queries were centred on occupancy outlook, interest rate impact and acquisitions.
  • Despite recession concerns, the US job market remains fairly strong – a key driver of office demand. We also do not expect a significant long-term impact on office demand from an increasing hybrid work environment.
  • Prime US REIT's valuation remains undemanding, with a ~10% yield and 15% below book.

Prime US REIT's 2H22 to be Slightly Weaker

  • Prime US REIT posted credible 1H22 results, with DPU up 5.7% y-o-y, 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 2H22, until these vacancies are backfilled.
  • On a positive note, leasing demand and enquiries for its assets remain healthy and better than our expectations.
  • About 86% of Prime US REIT's 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.

Stringing Eight Quarters of Positive Rent Reversions

  • 2Q22 reversion was at +10.9% (1Q: +3.9%). Leases were signed for ~86k sqf (1.8% of portfolio), with 47% being new leases. Demand was mainly from the finance, professional services and healthcare sectors.
  • Prime US REIT's management highlighted that leasing interest varies across markets, and is inversely proportionate to the duration of COVID-19 restrictions.
  • For FY22, rent reversion should stay positive, as asking rates are ~5.3% higher than spot rates. Active leasing discussions are ongoing at Tower I at Emeryville (TE), Village Centre Station I, Tower 909, 222 Main and 171 17th St.

In Advanced Discussions to Backfill Two-thirds of WeWork Space

  • A co-working tenant is currently in talks to take up two out of three floors at TE, which should take back occupancy close to 80% levels. The tenant is also looking at moving in on an as-is basis, which should minimise upfront capex and the free rent period.
  • Overall, we expect Prime US REIT's portfolio occupancy rate to fluctuate between 88-92% in the next few quarters, but remain comforted by leasing interest.

Acquisitions Only If the Asset Is a Right Fit and Price

  • Although Prime US REIT is seeing some opportunities in the market, its high trading yield and debt costs have made yield-accretive acquisitions a challenge. As such, it will only selectively consider too-good-to-miss buying opportunities.

We Trim FY22-24F DPU by 1-2%

  • Prime US REIT has an ESG score of 3.1 out of 4.0, based on our proprietary in-house methodology. As this score is one notch above our country median score, we applied a 2% premium to our intrinsic value to derive our target price.
  • BUY, new target price of US$1.00 for Prime US REIT from US$1.02, 39% upside.

Source: RHB Invest Research - 8 Aug 2022

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Prime US ReitUSD 0.545 -0.02 (3.54%) 1,991,000 

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