Prime REIT – Market Pessimism Likely Overdone

September 2022

Excerpts from RHB report

Prime REIT (SGX: OXMU)

  • 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.

Its valuation remains undemanding, with a c.10% yield and 15% below book. Recommend BUY, new TP of USD1.00 from USD1.02, 39% upside.

Prime REIT 2H to be slightly weaker

Prime REIT posted credible 1H results, with DPU up 5.7% YoY, 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, c.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 its 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

2Q reversion was at +10.9% (1Q: +3.9%). Leases were signed for c.86k sqf (1.8% of portfolio), with 47% being new leases. Demand was mainly from the finance, professional services and healthcare sectors.

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 c.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 the 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 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.

Trim FY22-24F DPU by 1-2%

PRIME 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 TP.

Prime Reit share price chart
Prime Reit share price chart

You can find the full report here and the company website here

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