RHB Group Still Upbeat On Prime US REIT
SINGAPORE – RHB Group Research analyst Vijay Natarajan is still bullish on the prospects of Prime US REIT. In fact, he maintained his “buy” rating on the trust, with a target price of US$1.02 (S$1.40), reported the Edge on Friday afternoon (20 May, SGT).
Natarajan thinks the unit price of the Singapore-listed REIT focusing on US office properties has underperformed year-to-date mainly due to misplaced fears over a prolonged and significant effect of work-from-home and recession concerns on office assets.
“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 percent yield are unjustified,” he explained.
While Natarajan is expecting Prime US REIT to face occupancy volatility, its office leasing momentum remains promising so far. Although its portfolio occupancy for the first quarter of FY2022 slid by 0.4 percentage points (ppt) quarter-on-quarter to 89.9 percent, its manager said it has since recovered back to over 90 percent, with the signing of new office leases in Q2 FY2022.
Moreover, the trust’s leasing activity was solid and broad based in Q1 FY2022, with around 171,000 sq ft of new office leases inked and additional 46,000 sq ft signed in April despite the Omicron wave. Of this, 32 percent were new leases, exceeding the 21 percent seen last year –another sign that tenants are returning to the office market.
However, there has been a notable decline in office occupancy during the current quarter at Tower 1 at Emeryville, as WeWork and another lessee have vacated the premises. In Q2 FY2022 another key tenant – Whitney, Bradley, & Brown – will exit Reston Square.
Nonetheless, the manager of Prime US REIT continues to see active interest for its vacated office space and expects that the trust’s overall portfolio occupancy would improve by the end of the year barring unforeseen circumstances.
In addition, Natarajan thinks that Prime US REIT would continue to record positive rent growth, as rent reversion in Q1 FY2022 reached 3.4 percent, while rent reversion including leases signed in April stood at 6 percent. Given that asking rents are still 6 percent below market, full-year rent reversion is projected to remain positive in low to mid single digits.
Furthermore, the trust still has the capability to acquire an office asset valued between US$100 million and 200 million in H2 FY2022 if market conditions stabilize, thanks to Prime US REIT’s modest gearing of 39.1 percent, while capitalization rates in target markets are still within the range of 5.5 percent to 7 percent range.