Prime US REIT added into S-REIT Benchmark Index

 

RHB Bank Singapore has kept its target price and &ldquo buy&rdquo call unchanged for Prime US REIT OXMU , following the REIT&rsquo s 3QFY2024 results ended Sept 30 which saw a lower distributable income of US$8.5 million ($11.5 million) y-o-y. RHB&rsquo s target price is kept at 23 US cents.

 

Analyst Vijay Natarajan says that the REIT is priming for a recovery, with its 3QFY2024 operational numbers in line, but distributable income was &ldquo slightly below&rdquo his expectations.

 

He says that the REIT has good leasing momentum with occupancy improvement expected in the coming quarters. The REIT signed about 210,000 sq ft of leases in 3Q2024, and about more than two times that in 2Q2024. 

 

However, portfolio occupancy slightly dipped to 83% as new lease signings were offset by tenant movement in some of its assets, the analyst notes. He still believes that the REIT is at a near-trough portfolio occupancy level with ongoing discussions on four large leases of about 60,000 to 100,000 sq ft. Of which, two are likely to materialise by early next year, bringing portfolio occupancy to more than 85%. 

 

Prime US REIT&rsquo s rental reversion was 6.5% for the new leases signed during the quarter, with most leases having built-in annual rent escalations of 2%-4%.

 

Meanwhile, Natarajan notes that Prime US REIT has completed refinancing of US$550 million of loans and as such has no debt maturing until July 2027, including extension options. 

 

&ldquo We anticipate year-end valuation to range from 0% to -5%, which should keep gearing below the 50% level,&rdquo he says. 

 

The REIT&rsquo s Waterfront at Washingtonian&rsquo s asset enhancement was completed in October, with the modernisation of tenant lounges, conference centres and full-service gyms. Occupancy increased 7 percentage points (ppts) to about 40% with another about 35,000 sq ft of lease expected to be signed in 4Q2024 taking occupancy to about 50%. 

 

Natarajan notes that Prime US REIT is in &ldquo active discussion&rdquo with a large tenant which if signed, could stabilise the asset with about 80% occupancy. 

On a broader note, the US election outcome is a &ldquo net positive&rdquo for office demand as Trump&rsquo s tax cuts are centred on creating more manufacturing jobs in the US which could in turn spur employment for sectors such as R& D, production and sales related roles, the analyst says. 

 

Tariffs could also prompt more multinational corporations to onshore, but the downside is that a stronger economy could result in persistent inflation and slower trajectory of interest rate decline which could result in delayed recovery for distribution per unit (DPU) and office sector valuations. 

 

The RHB team also recently visited three of the REIT&rsquo s assets in California, and highlighted some key takeaways from their visit. They note that return to office is improving but at a gradual pace, while safety and homeless situations being addressed has positively aided the REIT&rsquo s submarkets. 

 

&ldquo Flight to quality&rdquo trend continues to accelerate as employers have been relocating to high quality office spaces surrounded by key amenities while the industry is nearing the tail-end of downsizing and rightsizing of office spaces. 

 

Bigger tenants are placing more emphasis on the landlord&rsquo s financial position, and there is also a consolidation of another key trend with pockets of expansionary demand. 

 

As such, Natarajan slightly lowers his FY2024-FY2025 net property income (NPI) margin due to lower recovery income, resulting in an about 5% lower distributable income. He expects a 10% dividend payout, and his target price is pegged to 0.4 times FY2024 p/bv and includes a 2% environmental, social and governance (ESG) premium.