Prime US REIT - DBS Research 2023-08-10: Challenging Times Remain

• Prime US REIT (SGX:OXMU)'s 1H23 headline DPU -30% y-o-y to US$0.0246, in line with our estimates, largely due to the REIT raising the management fees paid in cash from 20% to 100%. On a like-for-like basis, estimated DPU -24% y-o-y on higher interest cost, and lower revenue (-3% y-o-y) and NPI (-7% y-o-y).
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• Prime US REIT's gearing improved marginally by 0.9ppt to 42.8% from 43.7% in 1Q23. It successfully extended the maturity of the US$400m term loan and revolver by another year, to mature in Jul 24. This gives Prime US REIT more time to secure refinancing in the hope that the macroeconomic outlook and US office sector could see a turnaround.
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• The hedging ratio remained stable at 80%, vs 79% in 1Q23 (63% is hedged/fixed from 2025 to 2026).

Key highlights & observations on Prime's 1H23 results

• Prime US REIT's portfolio occupancy fell by 3ppt q-o-q to 85.6% from 88.6% in 1Q23. The larger movements in occupancy were mainly from Park Tower (-11ppt q-o-q to 74.3%), 171 17th Street (-15ppt q-o-q to 80.5%), and Tower 909 (-3.7ppt q-o-q to 84.0%), partially offset by an occupancy improvement at 222 Main, Promenade I&II, and Sorrento Towers, with each property’s occupancy +c.2ppt q-o-q.
• Leasing activity remained slow in 2Q23, with Prime US REIT signing ~67k sqft of leases, vs 64.4k sqft in 1Q23. However, we note that Prime US REIT renewed the lease of its largest tenant, Charter Communication, in Jul 23, with an extended 3-year lease.
• The lease expiries remaining in FY23 have reduced to 9%, the largest of which is attributed to Prime US REIT’s third largest tenant Sodexo, whose lease is expiring in Dec 23. The lease contributes ~5.3% of cash rental income (CRI).
• Prime US REIT recorded strong positive rental reversion of 9.5% vs -2.6% in 1Q23. 1Q23 reversions would have been +3.2% excluding two renewals with minimal upfront tenant improvements (Tis), which have high positive net effective rental reversions.
• Management remains focused on net effective rents and embarked on asset enhancements, provided more efficient and selective amenitisation, and intensified tenant engagement with community activity with the aim of retaining existing tenants and attracting prospective tenants to their assets.
• Passing rents were 6.7% below that of market rents (vs. 6.8% below in 1Q23). Most assets are under-rented, except for Reston Square, One Washingtonian Center, and 222 Main.
• Prime US REIT's management has observed some greenshoots in the US office market, with increased leasing discussions for larger leases, albeit with longer lead times. Physical occupancy is improving slowly to 58% as at 4 Aug 23. More companies have mandated (at least hybrid) return to work. Similarly, larger tenants within Prime US REIT’s portfolio, such as AGG, Goldman Sachs, Matheson, and Teleflex have mandated a return-to-work policy.

Downgrade to HOLD; lowered target price to US$0.18.

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Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2023-08-10 SGinvestors.io

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