Photo: Prime US REIT
RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on Prime US REIT with a target price of US$1.02 ($1.40).
According to Natarajan, he believes that the stock has underperformed YTD largely due to misplaced concerns on a prolonged and deep impact to office assets from work from home impact and recession concerns.
“While risks have increased on the back of persistent inflation and ongoing Russia-Ukrainian war, we believe the valuation of 0.8x P/B and 10% yield are unjustified,” says the analyst.
Meanwhile, the REIT’s operational numbers for 1QFY2022 ended March met Natarajan’s expectations, with its estimated distribution per unit (DPU) up 8% y-o-y at 1.79 cents, aided by acquisition contributions, higher parking revenue up 30% y-o-y, rental growth as well as amortisation of lease termination income.
83% of Prime US REIT’s portfolio debt remains hedged with a 1% increase in interest rates resulting in a 1.4% impact to DPU. The analyst expects the impact of utility charges to be marginal, as it is mostly recovered from tenants on a usage basis.
Natarajan expects occupancy volatility but leasing momentum remains promising so far. Portfolio occupancy for 1QFY2022 dipped slightly by 0.4 percentage points (ppt) q-o-q to 89.9% but management noted that it has since improved back to more than 90%, with the signing of new leases in 2QFY2022.
Leasing velocity was strong and broad based in 1QFY2022 at approximately 171,000 sq ft of leases signed and additional 46,000 sq ft signed in April in spite of the Omicron wave, displaying healthy demand for its assets, of which 32% of these leases were new leases, higher than 21% for last year which is another sign of tenants returning to market.
However, there also has been a notable occupancy drop in the quarter at Tower 1 at Emeryville where WeWork and another tenant have left the premises. In 2QFY2022 another key tenant, Whitney, Bradley & Brown will leave Reston Square after being acquired.
Management continues to see active interest for vacated spaces in the market and expects overall occupancy to improve by year end barring unforeseen circumstances.
Nonetheless, the analyst believes that positive rent growth will continue, as rent reversion in 1QFY2022 stood at 3.4%, while rent reversion including leases signed in April came in at 6%. Plus, with asking rents still 6% below market, full year rent reversion is believed to remain positive in low to mid-single digits.
Despite the counter’s weak share price, which could affect equity fund raising possibilities, Natarajan believes that acquisitions are still on the table for the REIT. With a modest gearing of 39.1% and cap rates in target markets still within the range of 5.5-7%, the analyst foresees a possibility of acquisitions in the US$100-200 million range in 2HFY2022, if market conditions stabilise.
As at 4.17pm, units in Prime US REIT are trading flat at US 73 cents at a FY2022 P/B ratio of 0.83x and dividend yield of 10.1%.
Photo: Prime US REIT