• 1Q21 NPI and distributable income met 23% of our FY21e estimates. Portfolio occupancy dipped 0.7% to 91.7%.
• 99% rent collection with minimal lease expiries of 8%/8.4% in FY21e/FY22e, evenly spread across properties. Leasing pick-up expected with greater return to offices.
• Downgrade to ACCUMULATE from BUY as recent share-price improvements have likely priced in some positives. DDM target price of US$0.94 (COE 9.5%) unchanged.

The Positives

+ 1Q21 largely in line. Although Covid-19 cases in the U.S. hit new highs in January, Prime’s income was resilient. Rent collection remained strong at 99% with minimal rent concessions. Gross revenue and net property income were steady YoY. Property expenses increased 11.7% YoY due to a full quarter’s share of Park Tower’s expenses, acquired on 24 Feb 2020.

+ High renewals; minimal FY21 expiries. In 1Q21, Prime signed 57,647 sq ft of leases at positive rental reversions of 9.5%. More than 80% were renewals or for expansion by existing tenants. Leases were signed with Extend Health, CBRE and FLS Transportation, among others. Prime also signed 22,437 sq ft of short-term extensions. Leases due to expire in FY21 account for only 8% of cash rental income (CRI). These expiries are well spread across its properties with none above 1.4%. Month-to-month leases constitute only 0.7% of CRI.  

The Negative

– Portfolio occupancy dipped 0.7% to 91.7%. Several properties’ occupancy dipped QoQ. The more notable declines were at 222 Main in Salt Lake City and Promenade I & II in San Antonio. 222 Main’s occupancy fell 3% to 90.9%. That of Promenade I & II retreated 3.6% to 93.9%. The main reason was a few tenants left the buildings. January’s Covid-19 spike halted leasing in those markets. As such, portfolio occupancy eased 0.7% to 91.7%. Still, this was well above the Class A office average of 84.3%.  

Outlook

Leasing to pick up with greater return to offices. Widespread Covid-19 vaccinations have resulted in a swifter return to offices than originally expected. According to a JLL Global Real Estate Perspective survey in May 2021, most companies across the trade sectors that Prime is exposed to are expecting at least 80% of their workforce to return gradually to the office from 2H21. Hybrid working could be the norm in the near term for major companies, especially in the financial and technology sectors. Come mid-2022, office employment is expected to match the pre-pandemic peak, as the U.S. is estimating the creation of 2.3mn office-using jobs over the next two years. Goldman Sachs, Prime’s second-biggest tenant, has pushed for employees to return to the office by 14 July. Prime detects a pick-up in leasing in Denver and Atlanta. We expect its portfolio occupancy to improve closer to stabilised levels of 94-95% by 1H22.