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Broker's take: DBS initiates coverage on Prime US Reit with 'buy', US$1.05 target price

DBS Equity Research on Tuesday initiated coverage on real estate investment trust (Reit) Prime US Reit with a "buy" call and target price of US$1.05, noting that its portfolio is in "landlord-favourable" markets with runway for rental upside.

Prime US Reit units were trading up 0.5 US cent or 0.53 per cent to US$0.945 just before the midday break on Tuesday, with about 208,900 units changing hands.

"We believe Prime US Reit, the newest US office Reit to be listed on the SGX (Singapore Exchange), is in a sweet spot to grow its portfolio of assets as it builds its own track record to deliver superior DPU (distribution per unit) growth and DPU-accretive acquisitions," DBS analysts Rachel Tan and Derek Tan said.

"As investors familiarise themselves with its growth strategy over time, we believe there is potential for share price to trade up closer to its peers."

Overall, the US economy and office market have done well in the past few years, but Prime US Reit's properties are also positioned in markets which have favourable demand and supply dynamics and are in a "landlord-favourable" stage of the office cycle, they noted. This implies that rents could continue to increase, underpinning the Reit's growth outlook.

"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 per cent and 3 per cent per annum," they said.

The Reit's sponsor KBS Asia Partners is affiliated with the founding partners of KBS Group, one of the largest US commercial real estate managers with about US$11.6 billion of assets under management. KBS will also serve as the Reit's US asset manager.

The analysts observed: "With a strong track record and proven capability to add value to properties post acquisition, via the KBS group platform, the Reit should be able to access a healthy pipeline of opportunities. This should aid the Reit with its future inorganic strategy."

Downside risks to DBS's call include lower-than-expected rental income due to loss of tenants or slower upturn in spot office rents, changes to US tax regulations and interest rate risks.

The Reit's manager KBS US Prime Property Management is an associated company of Singapore Press Holdings (SPH), which publishes The Business Times. SPH holds a 20 per cent interest in the Reit manager through its wholly-owned subsidiary Times Properties.

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