• Results in line with expectations; 99% rent-collection rate, few deferrals (<0.3% of GRI) and minimal lease expiries (2%/8.7% in FY20e/FY21e) underpinned Prime’s income resilience.
• Continued strength in leasing. Most tenants still signing c.5-year leases.
• Maintain BUY and DDM target price of US$0.94 (COE 9.5%).

The Positives

+ Resilient income; on course to outperform NPI target. While 9M20 results exceeded expectations due to its Park Tower acquisition in 1Q20, 3Q20 results were stable QoQ. Prime continued to receive 99% of its rents, with minimal deferrals of US$0.27mn (0.25% of GRI) YTD. For the rest of FY20 and FY21, only 2.0% and 8.7% of its leases by GRI are due to expire. Portfolio WALE was 4.6 years. With minimal lease expiries, few deferrals and high rent-collection rates, Prime is expected to outperform its IPO NPI target by c.10% in FY20e.

+ Robust leasing. New leases of 83k sqft brought total space leased YTD to 166k sqft. The new leases were signed at a rental reversion of 8.9%. Over 60% signed YTD was for renewal or expansion by existing tenants. Lease terms and durations were about the same as pre-Covid levels. The majority was signed for about five years. Less than 10% was for a year or less. New tenants were largely from the established and technology sectors.

The Negative

– Portfolio occupancy dipped 0.4% QoQ to 92.6%. The decline in 3Q20 portfolio occupancy reflected natural expiries at Tower 909. Additionally, vacancies last quarter at Village Center Station I and 171 17^th Street had yet to be filled. Occupancies for both remained at 65% and 86% respectively. Nonetheless, Prime is starting to receive interest in these properties. At Tower 909, interest came from a major tenant that is expanding. Over at Village Centre 1, it came from companies looking to relocate to the urban center of Denver for hub-and-spoke. Interest in 171 17^th Street spiked after Microsoft’s move to the adjacent building.

Outlook

Under the new normal, Prime believes that the relevance of office space is now more hinged on it being a space for workplace collaboration, rather than it simply being a space for people to work. Most of Prime’s office buildings have lounges and Prime intends to convert these into collaboration spaces. Near term, it is working with tenants on their return to office. In the medium term, it will look at how it can modify its existing office spaces to support tenants’ needs for the longer term.

On the acquisition front, Prime has been exploring opportunities in Atlanta, Salt Lake City and Philadelphia. Although there have been more deals in the market, there has not been any distress-selling for it to pick up quality buildings at good bargains. Prime stands ready to seize good opportunities with its gearing of 32.7%, interest coverage of 5.8x and US$98.9mn undrawn facility.

Maintain BUY and DDM TP of US$0.94. Current price translates to a FY20e distribution yield of 9.6% for total potential upside of 34.1%.