3 reasons why I sold my Prime US REIT units

If you had come over from my analysis post on Prime US REIT, you might be a little surprised with this post as I mentioned in that post that I felt Prime US REIT was a worthwhile investment.

So am I now a sell-out? Hey, hold your horses alright?😂 I still pride myself on providing honesty and transparency to all my readers.

Though I have sold off all my Prime US REIT units, I still feel that it is a pretty decent REIT to invest in. The main reason why I sold off was due to a re-balancing of my portfolio and a change in investment style.

Hence, for this post, I would be sharing my reasons for selling off my Prime US REIT shares. Without further ado, let’s get right in.

An uncertain office outlook

I think this has to be the main reason why I sold my Prime US REIT shares. Personally, I believe that the work from home (WFH) phenomenon is here to stay.

While most companies may not implement 100% WFH once the pandemic passes, many are looking into hybrid work models. This is not really surprising given how entrenched the WFH culture is now. Furthermore, employees would also most likely be happier with hybrid work models.

With the shift towards a hybrid work model, companies thus have to rethink their purpose and need for office spaces. This could lead to a consolidation of office spaces or downright vacating such spaces once their leases are up.

Looking at the vacancy rates of the US office market, there could be a case to be made of a shift towards hybrid working models. However, it could also be due to the financial impact of the Covid-19 pandemic. Regardless, the rising vacancy rate remains a worrying trend.

Source: Colliers US office market outlook Q1 2021

The negative net office space absorption also points to a rather gloomy outlook for the US office market. This basically means that there the amount of vacated office space surpasses that of leased office spaces.

This negative office market sentiment can also be observed in Prime US REIT’s 1H 2021 performance.

Source: Prime US REIT FY2020 financial presentation
Source: Prime US REIT 1H 2021 financial presentation

As seen, the average occupancy rate for 1H 2021 dropped in comparison to FY2020. The bright spot is that rental reversion remained positive. This helps to cushion and compensate for the potential negative impact to Prime US REIT’s rental income due to weaker leasing momentum.

Looking at the trends so far, I expect the US office market to remain weak in the near future. Thus, this contributed to my decision to sell off my Prime US REIT units.

Prioritising growth and stability

For my REIT investments moving forth, I will be investing in REITs with growing and rather stable and predictable rental revenue. I just do not see that in Prime US REIT.

The growth portion

Looking at Prime US REIT’s 1H 2021 results, there is not much financial growth from 1H 2020.

Source: Prime US REIT 1H 2021 financial statement

As seen, 1H 2021 gross revenue only increased by 1.2% as compared to the same period in 2020. In addition, net property income took a dip when compared to 2020. This is quite concerning given that Prime US REIT’s 1H 2021 results already included contributions from Park Tower, which was an acquisition made in February 2020.

Besides low and negative growth in gross revenue and net property income, distributions also did not increase much.

Source: Prime US REIT 1H 2021 financial statement

Comparing distributable income for the period, we can see that it actually decreased in comparison to 1H 2020.

Besides considering growth in the financial sense, I would also look at a REIT’s tenancy mix. Preferably, I would opt for REITs with tenants which are in growing industries such as technology, bioscience and sustainable energy.

Looking at Prime US REIT’s tenant mix, much of it is stable and established sectors.

Source: Prime US REIT 1H 2021 financial presentation

As seen, the majority of Prime US REIT’s tenants are in the services, communications and finance sectors. Such sectors are typically more resilient in nature and thus provide some sort of stability to a REIT’s rental revenue.

However, this stability can come at a cost as there might not be much organic demand or need for more office spaces. Furthermore, baring the communications sector, tenants in the financial and services sectors can easily downsize their office space needs without a huge built-in cost.

As such, considering both the tenancy mix and revenue growth of Prime US REIT, I do not foresee huge growth in Prime US REIT’s future rental revenue.

The stability aspect

When it comes to judging a REIT’s revenue stability, I look at three main parts; length of lease, tenancy mix and track record. On these three factors, Prime US REIT’s performance is rather mixed.

While it satisfies the part on tenancy mix as Prime US REIT’s main tenants are in rather resilient sectors, it does not perform that well on the other two factors.

On the length of lease, Prime US REIT’s weighted average lease expiry (WALE) stands at 4.1 years as of 1H 2021. In comparison to FY2020, it was a slight decrease from 4.4 years. As a matter of fact, Prime US REIT’s WALE has been on a downward trend since its IPO.

This could mean that new leases signed are getting shorter in nature. If we were to compare the lease expiry profile of Prime US REIT from 2019 onwards, this might seem to be the case.

Source: Prime US REIT FY2019 financial presentation
Source: Prime US REIT FY2020 financial presentation
Source: Prime US REIT 1H FY2021 financial presentation

Looking at Prime US REIT’s lease expiry profile of the past years, the percentage of leases with an approximate expiry of 3 or more years based on cash rental income (CRI) has been declining. In 2019, this figure stood at 84.8% before decreasing slightly to 82% in 2020 and then 64.6% in 1H 2021.

With potentially shorter new leases and a decline in portfolio occupancy, I thus felt that Prime US REIT’s future rental income would not be that stable or predictable.

In terms of Prime US REIT’s track record, I think much still remains to be seen given its short time on the market. Personally, I do not have any complaints about the REIT manager thus far.

Taking both growth and stability into consideration, I felt that there would be limited growth for Prime US REIT in the short to mid-term, due to its tenancy mix and the general US office market trends. Coupled with the possibility of shorter new leases, I thus felt that there would be better REIT opportunities elsewhere in the market.

Long term prospects and REIT mandate

My final reason for selling Prime US REIT is that I am not entirely confident of its long term future.

Given the name of the REIT and its sponsor, future acquisition of properties will only be limited to the United States, as that is its mandate and sponsor’s area of expertise. Thus, its rental growth for the next 5 to 10 years would be entirely dependent on the US office market.

This narrow focus and pool of potential properties just make me feel a little uncomfortable. Personally, I would rather invest in REITs with a global mandate as that would allow more room for growth.

Furthermore, by being limited to just the United States market, the growth potential of Prime US REIT would be dependent on the GDP growth of the United States. With the United States having an average GDP growth of 2.5% to 3.5% in the past 20 years, I am not sure that is entirely a good idea.

With that said, I still feel that the United States would remain a major economy and superpower in the future. Whether it would retain its influence over the world remains to be seen.

Personally, I think the global influence of the United States will wane in the future. On that note, I thus rather own investments that have multiple potential avenues of growth.

Conclusion

So there it is the 3 main reasons why I sold my Prime US REIT units. So, should you sell your units in Prime US REIT too if you have them?

Well, I think that would heavily depend on why you invest in the REIT in the first place.

If it is to get a stable dividend payout, I think that is still quite alright to hold the REIT in the short to mid-term. Furthermore, with a forward dividend yield of 8.14%, the risk to reward ratio is rather acceptable too.

However, if you want a REIT that can exponentially increase its DPU and revenue, Prime US REIT might not be a suitable investment. Personally, I also feel that there are better REITs to invest in for the long term.

Do you agree with my reasons for selling Prime US REIT? Let me know in the comments below!

As always, invest safely and get profitable returns.:)

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4 Comments

  1. Hi Jax,

    Thanks for the article. With regards to this paragraph “Looking at Prime US REIT’s lease expiry profile of the past years …. decreasing slightly to 83.1% in 2020 and then 65.5% in 1H 2021”, may I know if it has anything to do with the 3 charts above it as I can’t seem to relate the figures to the charts?

    Also, you mentioned that there are better REITs to invest in so would you be able to share with us which are the ones you are looking at now?

    Thank you!

    1. Hi ABY, yes the sentence referred to the 3 charts above it. I was comparing the percentage of lease areas that were expiring in 3 or more years per FY. So for instance in 2019, if you add up the percentage of expiring leased area from 2022 onwards, you will get 84.7%. If this percentage starts decreasing as time passes, it means that new leases signed or renewed are getting shorter in nature. Hopefully, this explanation helps!

      With regards to what REITs I am currently invested in, they would be Parkwaylife, Ascendas, Keppel DC, Ascott and Lendlease. Mapletree NAC is also another one I have units in but that is considered to be less ‘stable’ as compared to the others. Do note that now might not be the best time to look at some of these REITs due to their relative market valuation.

      1. Hi Jax,

        Thanks for your reply. I tried to add up the expiring leased area from 2022 onwards on the Y2019 chart (i.e. 7.9+17.2+16.3+15.5+3.4+9.8+13.5), and I arrived at 83.6% and not 84.7%. Have I taken the right figures to add them up?

        1. Oh, the figures stated were in terms of leased expiry according to cash rental income. Using cash rental income instead of net lettable area (NLA) gives a more accurate representation of the potential risk and impact on Prime US REIT’s rental income should non-renewals happen.

          Anyway looking through the figures I realised that there were some slight errors😅. Thus I already made some slight amendments to them.

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