SINGAPORE (Nov 5): DBS Group Research is initiating coverage on Prime US REIT with a “buy” call and a target price of US$1.05.
In a Tuesday report, analyst Rachel Tan notes that Prime US REIT, which is also the newest US office REIT to be listed on the SGX, is poised to deliver superior DPU growth and DPU-accretive acquisitions as it looks to grow its existing asset portfolio.
“As at 1 January 2019, the initial portfolio had an average occupancy of 96.7% and a committed occupancy of 97.3% which is above the typical market average. In addition, most of the initial portfolio, nine out of 11 properties had a committed occupancy above 95.0% as at 1 January 2019,” says Tan.
Tan goes on to cite certain strengths in the Prime US REIT’s portfolio. Firstly, Tan believes that the REIT’s stable and resilient cashflows are factors for investors to consider. These come on the back of its long weighted average lease expiry (WALE) by net lettable area (NLA) of 5.5 years
“The [REIT’s] initial portfolio also has a staggered lease expiry profile with not more than 19.8% and 18.8% of leases by cash rental income and NLA expiring in any given year within the next eight years respectively,” says Tan.
Furthermore, potential positive rental reversions are what Tan terms “a strong attribute” of the REIT’s initial portfolio, and a near-term growth driver for the REIT.
“Average rents for leases expiring in FY19 and FY20 are below market rents by 24.6% and 8.8% respectively. As Prime US REIT renews its leases over the next two years, there is potential for positive rental reversions which would help drive near-term earnings and distributable income,” says Tan.
Tan also likes how the REIT’s properties are located in urban locations with “strong market attributes” such as key business districts within their respective office markets or in prominent urban centres with proximity to mixed-use amenities.
“[This] implies continued increase in rents to underpin the REIT’s growth outlook,” says Tan. “In addition, average rents for leases expiring in FY19 and FY20 are below market rents and new contracted leases have in-built rental escalations of between 1% and 3% per annum.”
Apart from its growth strategy, Tan believes that the REIT has access to a healthy pipeline of opportunities through its sponsor, KBS Asia Partners (KAP).
“KAP [is] affiliated with the founding partners of KBS Group (KBS) which is one of the largest US commercial real estate managers with US$11.6 billion of assets under management (AUM),” notes Tan, adding that KBS will also act as the REIT’s US asset manager.
Tan says this means the REIT’s future inorganic strategy will be aided by KBS’ strong track record and proven capability to add value to properties post-acquisition.
“The ability to tap the expertise and extensive scale of KBS real estate operating platform in the US, enables the REIT to be close to the ground, be at the forefront of any major leasing transactions out in the market, as well as to remain competitive and fulfil their own tenant needs,” shares Tan.
“In addition, given the sponsor’s sizeable scale in the US, Prime US REIT may also gain access to any deals that are being made available for the group,” adds Tan.
As at 12.51 pm, units in Prime US REIT are trading 0.5 cent higher at 94.5 US cents. This is 20.4 times FY19F earnings and gives it a distribution yield of 6.9% for FY19F, according to DBS valuations.
