Prime US REIT - DBS Research 2020-03-06: A Good Start Is Half The Battle Won

PRIME US REIT (SGX:OXMU)

Prime US REIT - A Good Start Is Half The Battle Won

Prime US REIT (SGX:OXMU)’s maiden acquisition of Park Tower for US$170m (total cost) comes with an implied FY19 NPI yield of 6.9%.
Park Tower offers a strong and stable income visibility with committed occupancy of 92.2% and WALE of 5.6 years.
Prime US REIT ended its first financial year (FY19) ahead of its forecast; another good record!

The acquisition of Park Tower, Sacramento, California for a total cost of US$170.1m (including acquisition costs) marks the completion of Prime US REIT’s maiden acquisition in Feb 2020, within half a year post listing.
Park Tower is a freehold Class A 24-storey office tower located in the prime CBD of Sacramento with total NLA of 489k sqft.
The purchase price implies FY19 NPI yield of 6.9%.

Committed occupancy stood at 92.2% with a long WALE of 5.6 years, offering steady income visibility from the property. We understand the physical occupancy was c.88%. There are minimal lease expiries in FY20 and 12.9% of the leases are expiring in FY21. The leases have an average rental escalation of 2.9% pa.
Prime US REIT could ride on potential rental upside from current weighted average rent of US$33.4 psf which is 21.4% below the market rent of US$40.5 psf.
Park Tower’s top 10 tenants contribute 71.1% of the building’s cash rental income (CRI). Its largest and major tenant is the State of California which contributes 29.8% of the building’s CRI. The lease to the State of California is a long lease with majority of the lease to expire in five years. This provides stable income visibility.
We understand that the government is the largest employer in Sacramento as the state capital of California. Prime US REIT’s portfolio occupancy will increase to 96.3% from 95.8% post the acquisition, where the government sector will contribute 3.6% of Prime US REIT’s CRI.

The acquisition will be 70:30 funded by private placements and debt.
On 12 Feb 2020, Prime US REIT raised US$120m via private placement at US$0.957 per share. Given the strong interests, Prime US REIT upsized the placement of US$100m with an additional US$20m.
Based on the pro-forma number and the capital structure, the acquisition is estimated to be DPU accretive by 2.7%.

Park Tower is one of the finest quality Class A office towers located in downtown Sacramento. It is considered one of the top three buildings out of 12 buildings in downtown Sacramento, totalling 3.7m sqft with 95.3% occupancy. It is a 24-storey office tower with 5-storey mixed use retail/parking garage. It features a 3-storey atrium lobby and has the highest parking ratio of 2.4 in the micro market.
Located just three blocks from the State Capitol building and two blocks from Downtown Commons and Golden 1 Center, Park Tower is centrally located in the midst of a growing private sector particularly in the healthcare and biotech sectors.
Sacramento is the state capital of California and is one of the strongest economies in California with an average Gross Metropolitan Product (GMP) growth rate of 3.2% p.a from 2013-2018, above the US average of 2.3%. Given its abundant and highly-educated workforce, and a cheaper alternative to San Francisco, Sacramento is increasingly attracting private sector players especially those healthcare and biotechnology.

Prime US REIT reported its first year of results, for the period from 19 Jul to 31 Dec 2019, with DPU at 3.15 US cts, ahead of its forecast of 2.93 US cts (+7.5%). 4Q19 DPU of 1.77 US cts was 9% higher vs its forecast of 1.62 US cts.
Revenue and NPI were 2% and 3% higher than their forecasts largely due to higher rental income and recovery income.
Occupancy fell marginally to 95.8% vs 97% in 3Q19 and FY19 mainly due to transitory movements of tenants. Most of the vacancies have already been backfilled.
Prime US REIT successfully recorded positive rental reversions of 12% for new leases signed and 9% on renewal leases. Lease expiry renewals for FY20 and FY21 remain low at below 10%; 6.9% and 8.4% respectively.
Prime US REIT’s gearing stood at 33.7% as at Dec 2019. Gearing levels should remain relatively stable post the acquisition. Average cost of debt was 3.3% in FY19.

We maintain our BUY rating on Prime US REIT and Target Price of US$1.05. We raised our FY20F/FY21F DPU estimates by 2% to 3% to factor in the acquisition of Park Tower.
Prime US REIT is currently trading at c.7% FY20F/FY21F dividend yield. Meanwhile, its peers, the US office REITs listed in Singapore, trade at a range of 6.1-8.2% dividend yield for FY20F and 6.8-8.6% for FY21F.
See Prime US REIT Share Price; Prime US REIT Target Price; Prime US REIT Analyst Reports; Prime US REIT Dividend History; Prime US REIT Announcements; Prime US REIT Latest News.
We believe Prime US REIT, the newest US office REIT to be listed on the SGX, is in a sweet spot to grow its portfolio of assets as it builds its own track record to deliver superior DPU growth and DPU-accretive acquisitions. As investors familiarise themselves with its growth strategy over time, we believe there is potential for Prime US REIT's share price to trade up closer to its peers.
For comparison of Manulife US REIT (SGX:BTOU) vs Prime US REIT (SGX:OXMU) vs Keppel Pacific Oak US REIT (SGX:CMOU), see report: US Office S-REITs - DBS Research 2020-03-06: Your American Heroes.
See also recent SGX Market Update: SGX’s US-Focused Office REITs December Quarter Earnings.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-03-06

SGX Stock Analyst Report BUY MAINTAIN BUY 1.050 SAME 1.050