Prime US REIT - DBS Research 2023-02-09: Navigating Through Headwinds

• Prime US REIT (SGX:OXMU)'s FY22 DPU -3.4% y-o-y to US$0.0655, slightly below our estimates, largely due to higher interest costs (+27% y-o-y) and absence of one-off termination fee income received in 2H21, partially offset by full-year contributions from the acquisition of two assets in Jul 21.
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• Prime US REIT's gearing increased by 3.4ppt to 42.1% from 38.7% in 3Q22, largely due to the decline in portfolio valuation (-6.6% y-o-y). Effective interest rates inched up q-o-q to 3.4% from 3.1% in 3Q22. All-in average cost of debt inched up marginally q-o-q to 3.3% from 3.2% in 3Q22.
• Hedging ratio is at 82%, vs 83% as at 3Q22, with fixed rates (hedged/fixed) expiring during mid-2024 to 2029 (65% is hedged/fixed from 2025 to 2026).
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Prime US REIT FY22 – Key Highlights & Observations

• Prime US REIT's portfolio occupancy held relatively stable at 89.1%. The larger movements in occupancy were mainly from Promenade I&II (- 13.4ppt q-o-q to 85.2%) and Tower 909 (+3.5ppt to 88.2%).
• Leasing activities have slowed in 4Q22. Prime US REIT signed 143k sqft of leases in 4Q22 (-42% q-o-q), mainly led by the new lease at Tower 1 at Emeryville in 3Q22 (high base). 4Q22 leasing activities were mainly led by tenants from scientific R&D services, finance, biotechnology, manufacturing, and legal services. Despite the slowdown in 4Q22, 2Q22 was the slowest quarter for the year, with only 86k sqft of leases completed.
• Strong positive rental reversions of 20%, mainly from Crosspoint. In 4Q22, Prime US REIT recorded very high positive reversions of 20.2%, substantially from two tenants from Crosspoint, which saw
• an existing tenant downsize from 84k sqft to 57.5k sqft but extend the lease to 2032,
• a new tenant backfilled space and signed a lease till 2034. Both leases saw reversion of >25%.
• Management continues to expect positive rental reversions in 2023. One of the top 10 tenants (~5% of CRI) with its lease expiring at the end of this year has been rumoured to be looking at other buildings. Prime US REIT will be focused on engaging the tenant for the lease.
• Passing rents are 6.3% (vs. 6.7% in 3Q22) below that of market rents. Most of Prime US REIT's assets are under-rented, except Reston Square and One Washingtonian Centre.
• Portfolio valuation declined by 6.7% y-o-y with weighted average cap rate expanding by 47bps. Prime US REIT’s portfolio valuation fell by 6.7% y-o-y and cap rates expanded between 25bps to 75bps. Larger properties that saw a larger decline were 222 Main (-9.5%; cap rates expanded 50bps), Village Centre Station II (-8.1%; 50bps – possibly due to lower occupancy), Park Tower (-6.9%; 25bps), and 171 17th Street (- 4.8%; 50bps).
• Majority of Prime US REIT’s assets have physical occupancy above 50%. Overall physical occupancy in the US office market has improved, surpassing 50% for the first time since the start of the pandemic, albeit uneven across markets. Physical occupancy at Prime US REIT’s assets ranges between 25% to as high as mid-80%. Majority of the assets are above 50% physical occupancy.
• Retirement of Barbara Cambon, CEO and CIO, from 8 Mar 2023, who will be succeeded by Harmeet Singh Bedi, current Deputy CEO and CFO. Barbara has been the cornerstone of the REIT that has listed Prime US REIT. We would like to wish Barbara all the best and a happy retirement. Congratulations to Harmeet on his promotion!

Maintain BUY on Prime US REIT; lowered target price to US$0.63.

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Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2023-02-09 SGinvestors.io

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