Stronger leasing, better reversions
Growth, better visibility from acquisitions
PRIME’s 2H21 DPU rose 0.9% YoY/3.6% HoH, driven by contributions from Sorrento Towers and One Town Center, which were acquired in Jul 2021. Occupancy was lower in 4Q21, but should increase with stronger leasing momentum in FY22. DPU visibility is high, and underpinned by a 4.2-year WALE, and 2.0% p.a. growth from its AUM, currently under-rented by 7.3%. We see better fundamentals as physical occupancy recovers, with catalysts from improving leasing activity, and upside from acquisitions. The results were in line with consensus’ and our estimates, and our forecasts are unchanged. Valuations are compelling at 8+% FY22 DPU yield, and 30+% upside to our USD1.10 DDM-based TP (COE: 8.4%, LTG: 2.0%).
Lower occupancy, backfilling underway
Portfolio occupancy fell to 90.3% in 4Q21 (from 91.4% in 3Q21), due mainly to lower occupancies at Tower I at Emeryville (which fell from 95.9% to 70.4%) and Crosspoint (100% to 94.6%). At the former, a resolution has been reached with WeWork (which occupied c.26% of the NLA), with settlement fees for an early exit expected to cushion PRIME’s income through to 4Q22. While backfilling is underway, demand is likely to lag recovery at One Washingtonian Center (80.6% occupied due to a pre-term in 3Q21). Management expects occupancies to bottom out by 1H22, in line improving macros and leasing sentiment.
Positive rental reversion trend
Leasing momentum picked up in 2H21 at +114% HoH, although it eased in 4Q21 to c.95k sf, at a +7.8% rental reversion, from c.187k sf in 3Q21 (at +19.2%). About two-thirds of this were renewals, while c.33% were new leases, versus c.18% in 3Q21. Rental reversion for FY21 was stronger at +14.1% (or +15.8% excluding short term leases <1 year), versus +6.9% in FY20. Expiring leases in FY22 are low at 10.1%, with nine (of 14) properties at sub-1%. We see positive rental growth, with in-place rents at 7.3% below passing rents, except for Reston Square, which contributes 2.7% of expiries in FY22, at rents 15.1% above market.
Strong balance sheet, deal upside
Gearing was stable at 37.9% (from 38.4% at end-Sep 2021), while AUM rose c.18% YoY to SGD1.7b at end-Dec 2021 with two new properties. We see a SGD415m debt headroom (at 50% limit) supporting potential acquisitions. PRIME compares well with its US office S-REIT peers, as it has low nearterm leasing and refinancing risks. We see upside from deal opportunities and as it targets FTSE EPRA NAREIT Index inclusion in the medium term.