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.
• 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 of $1.10 (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.

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.

Source: Maybank Kim Eng Research - 12 Feb 2020