RHB initiates coverage of Prime US Reit with 'buy'

Singapore

RHB has initiated coverage on Prime US Reit with a "buy" rating and a target price of US$1, given its "resilient and attractive" yield, and expectations of stable rental income.

In a research note on Thursday, RHB analyst Vijay Natarajan said that Prime's sustainable yield of 9 per cent is among the highest in the real estate investment trust (Reit) sector. The brokerage has based its distributions per unit forecast on a 100 per cent pay-out ratio, and 80 per cent of management fees being paid in units.

The analyst noted that the high yield gap - compared to the 5.4 per cent peer average among Singapore-listed Reits (S-Reits) - is unjustified.

He added that Prime's yield is also higher than its US-listed peers, which currently trade at an average forward dividend yield of 4.9 per cent. Prime also offers the highest yields compared to other US office S-Reits, such as Manulife US Reit and Keppel Pacific Oak US Reit.

Apart from an attractive yield, RHB also expects Prime to have stable rental income, due to its strong asset and tenant quality, with limited near-term lease expiry.

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Prime's portfolio comprises 12 freehold office buildings across 10 key markets across the US. The analyst noted that the assets are well-diversified, with no asset accounting for more than 15 per cent of total portfolio value.

He added that most of Prime's assets are new or recently refurbished, with good amenities, and located across low density urban environments, which have a highly educated workforce.

RHB noted that Prime has maintained a high rent collection rate of 99 per cent from March to September this year, despite the US economy suffering a sharp negative impact from Covid-19.

"This, in our view, highlights the good credit quality of its tenants, and portfolio exposure to the right market sectors," the analyst said. RHB also expects office assets to stay relatively resilient.

"Despite near-term headwinds for leasing demand, we do not anticipate a significant long-term structural impact to the office sector, post-Covid-19," the analyst said. "We anticipate firms will adopt a more flexible work structure, with more options to work from home (WFH), and hot-desking, rather than a complete WFH approach."

While some tenants may choose to downsize in future, RHB expects strong demand from technology, healthcare and government-related tenants to partially offset the impact.

The brokerage also noted that Prime's portfolio average rent is still 7 per cent below market. It expects flat to slightly positive rent reversion for Prime's portfolio for the 2021 financial year.

The overall weighted average lease expiry also "remains healthy" at 4.6 years. RHB added that the limited near-term lease expiries for Prime would mitigate the short-term impact of Covid-19-related leasing uncertainties.

The brokerage also noted that Prime has good headroom for accretive acquisitions in 2021.

Its gearing, at 32.7 per cent, is one of the lowest among S-Reits, and presents it with a debt headroom of US$324 million for acquisitions, assuming gearing is raised to 45 per cent, the analyst said.

The brokerage noted that the key risks for Prime include a prolonged deep recession in the US, potential widespread adoption of WFH trends post pandemic which could reduce office demand, and potentially dilutive equity fundraising to fund acquisitions.

Prime's units closed unchanged at 76.5 US cents on Thursday.