Company Update: Negative reversionary growth to bottom out
Led by improved occupancy at Metropolis Tower in Hung Hom, Prosperity REIT’s portfolio occupancy has edged up to >97% from Jun-21’s 96%. Leasing momentum has seen signs of picking up since mid-21 along with economic recovery. Occupancy at Metropolis Tower advanced to >95% from Jun-21’s 89.5% thanks to new tenants relocating from Tsim Sha Tsui, mainly from IT and electronics trades. Meanwhile, at Prosperity Millennia Plaza in North Point, there was in-house expansion from the IT and pharmaceutical tenants. Occupancy remained firm at c.97%. Driven by strong demand from retail service trades, particularly beauty tenants, occupancy at Prosperity Place in Kwun Tong climbed slightly from Jun-21’s 97.8%. Currently, c.60% of gross rental area in Prosperity Centre is let to semi-retail tenants including beauty, bakery house and education tenants.
Reversionary growth should stay negative at 8-9% in 2H21. Spot rents have started to stabilize as office leasing market turned more active in the recent months. Prosperity REIT has concluded the renewal for c.25% of the leases scheduled for expiry in 2022, which account for 39.6% of the portfolio in terms of gross rental area. The majority will take effect in 1H22 with higher concentration in Trendy Center. Reversionary growth at Trendy Centre and Prosperity Place show signs of turning positive in 2022. On the other hand, rental reversion at Metropolis Tower should stay in the negative territory as MNC demand remain subdued. Against this backdrop, overall rental reversion should turn less negative in 2022.
Carpark utilization rate has exceeded pre-COVID level since mid-21 as economic activities start to normalize. Hence, we forecast carpark income to grow by a similar >10% in FY21 (1H21: +12%). Overall, we estimate FY21 and FY22’s revenue to fall by 2% and 1% respectively, primarily dragged by negative reversionary growth. With cost to income ratio expected to stay at c.21% (FY20: 20.9%), NPI should drop by a similar 2% in FY21.
Prosperity REIT has completed the building management system upgrade and chiller plant replacement at Prosperity Millennium Plaza with total capex of c.HK$20m in 2021. In 2022/23, Prosperity REIT will commence the asset enhancement works at Metropolis Tower in phases with budget capex of >HK$30m. The lobby renovation will commence shortly in early 2022. Other ESG-related enhancement initiatives, mainly at Metropolis Tower, are also in the pipeline.
Prosperity REIT is in discussions with banks on the refinancing of HK$1.54bn term loans maturing in Nov-22, with credit margin expected to be slightly higher than the existing one (82 bps).
Prosperity REIT continues to explore acquisition opportunities, preferably grade B offices.
Since May-21, Prosperity REIT has bought back 41m shares, representing c.2.7% of its outstanding shares. This has underpinned its unit price performance which rose by 3% in the past six months, outperforming its peers by 5-13%.
Following the price rally, Prosperity REIT currently offers distribution yields of 5.7-5.6% for FY21-22. Negative reversionary growth shows signs of bottoming out as spot rents start to stabilize. This should improve sentiment towards the REIT. Furthermore, ongoing unit buyback should continue to provide strong price support, and hence, we maintain BUY with a DDM-based TP of HK$3.34.