PRIME US REIT (SGX:OXMU)
Prime US REIT - Adding Onto Growth
Upping DPUs and Target Price, upside from first deal
- We raised DPUs for Prime US REIT (SGX:OXMU) by ~2% on its better-than-expected interim (from 1 Oct-31 Dec 2019) and maiden full-year (from 19 Jul-31 Dec 2019) results. See Prime US REIT Announcements.
- US office market fundamentals remain strong, backed by high net absorption, specifically in its key sub-markets. We see further DPU upside from its maiden acquisition in Sacramento, at a 6.9% NPI yield and a +2.7% DPU accretion.
- Prime US REIT remains well-leveraged towards positive US macros, with valuation undemanding at 6.9% FY20 dividend yield, both against its Singapore and US-listed peers. With 14% total return to our DDM-based target price (COE: 7.4%, LTG: 2.0%), we reiterate BUY.
Better-than-expected interim results
- Prime US REIT's 4Q19 revenue, NPI and DPU exceeded IPO projections by +2.0%, +3.0% and +9.0% respectively, while its first full-year projections outperformed by +2.2%, +2.9%, and +7.5%. This was driven by strong net absorption in 4Q19, helped by demand from technology sector tenants.
- Its occupancy rate dipped q-o-q from 97.0% to 95.8% as of end-Dec 2019 largely due to transitory vacancies. We believe that US demand market fundamentals remain strong against firm underlying employment growth skewed towards the financial, professional and information service sectors.
- Prime US REIT's DPUs are well-supported – 98% of leases have pa rental escalations. See Prime US REIT Dividend History.
Maiden deal at 6.9% NPI yield, 2.7% DPU accretion
- Prime US REIT has quickly announced its first acquisition post-IPO – Park Tower in Sacramento, California is a well-sited freehold Class A office asset, which should add 14% to its AUM. Its USD165.5m purchase is at a 2.6% discount to valuation and implies a 6.9% NPI yield. It is lower than 7.2% for Manulife US REIT (SGX:BTOU)’s recent Capitol acquisition; its leases are backed by stable government-related tenancies (34.4% of cash rental income) and we see income growth led by rising occupancies (from 92.2% currently) with its lease structures embedded with on average +2.9% pa rental escalations.
Undemanding valuations, scores well against peers
- Prime US REIT's balance sheet remains strong with leverage at 33.7%, which suggests a USD260m debt headroom (at 45% limit).
- Prime US REIT has re-rated after its Jul 2019 IPO, on the back of investors’ yield appetite. We await disclosures from management team with the reporting of further interim earnings.
- See Prime US REIT Share Price; Prime US REIT Target Price; Prime US REIT Analyst Reports; ; Prime US REIT Announcements; Prime US REIT Latest News.
Chua Su Tye
Maybank Kim Eng Research
|
https://www.maybank-ke.com.sg/
2020-02-12
SGX Stock
Analyst Report
1.10
UP
1.000
