• Resilient portfolio with eight consecutive quarters of positive rental reversions. Leases signed in 2Q22 enjoyed positive rental reversions of +10.9%.
• Minimally impacted by rising interest rates, with 86% of debt either on fixed rate or hedged through interest rate swaps. Around 51% of debts have hedges in place through to 2026.
• Maintain BUY, DDM-TP (COE 10.55%) lowered from US$1 to US$0.88 as we trim our FY22e-FY24e DPU by 1-2%. Our COE nudged up from 9.6% to 10.55% on higher risk-free rate assumption and market risk. PRIME is our top pick in the US office sector for greater tenant exposure to STEM/TAMI sectors. Catalysts include improved leasing and a greater return to office. The current share price implies FY22e/FY23e DPU yield of 11.4/11.6%.

Investment thesis

• 8 consecutive quarters of positive rental reversions. PRIME signed 85.7k sq ft, or 1.8%, of portfolio CRI in 2Q22, with an overall rental reversion of +10.9%; 47% of which were new leases. 2Q22 leasing activities were mainly from 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

• Resilient portfolio. PRIME has a diversified portfolio, with no single primary market contributing more than 11.7% of CRI and no single property contributing more than 13.8% of CRI. Portfolio occupancy remained stable in 2Q22 at 89.6%. PRIME also has a healthy WALE of 4 years, with well staggered lease expirations. Their tenant industry sector diversification also contributes to their resiliency, with 74% of tenants in established and growth (STEM/TEMI) sectors.

• Minimally impacted by rising interest rates, as c.86% of debt is either on fixed rate or hedged through interest rate swaps. About 51% of debts have hedges in place through to 2026, while c.18% of debts are hedged for the next 2 years. About 17% of debt is on fixed rate and matures in 2029. No debt expiring until 2024, assuming the exercise of extension options. PRIME has aggregate leverage of 37.8%. According to our calculations, every 100 basis points increase in interest rates would affect FY22e DPU by c.1.1%.

Outlook

As of June 2022, office-using employment increased by about 1.6 million (+4.8% YoY), and there were 1.06 million (+3.2%) more office-using workers than before the pandemic began. The US job market remain healthy and this has spurred many companies to add office space to house a larger workforce.

Leasing activity picked up in 1H22 with stronger demand coming from the financial, professional services and healthcare sectors. Physical occupancy across the portfolio is at c.50% as more tenants implement their return-to-work plans. With in-place rents c.5.3% below asking rents, PRIME’s portfolio is primed for more positive rental reversions.

Maintain BUY, and DDM TP lowered from US$1.00 to US$0.88.

DDM-TP lowered from US$1 to US$0.88 as we trim our FY22e-FY24e DPU by 1-2%. Our COE nudged up from 9.6% to 10.55% on higher risk-free rate assumption and market risk. The current share price implies FY22e/FY23e DPU yield of 11.4/11.6%. PRIME is our top pick in the US office sector for greater tenant exposure to STEM/TAMI sectors and the resiliency of its portfolio. Catalysts include improved leasing and a greater return to the office. PRIME is also trading at an attractive 25% discount to book.

Source: Phillip Capital Research - 14 Sep 2022