UPDATE: Deutsche Bank Initiates Coverage On Paramount Group

Deutsche Bank initiated coverage on Paramount Group Inc PGRE Monday with a Buy rating and $20 price target.

Analyst Vin Chao noted that the company “represents a pure play on the trends within the Class A, CBD office markets of NYC and to some degree DC and SF.”

Chao saw “significant upside in cash NOI over the next several years as signed leases commence, free rent periods burn off, and contractual rent bumps kick in. On top of this significant level of contractually embedded growth, we also see added NOI upside from below market rents and lease-up of vacancy.”

“With an occupancy rate of 92.1 percent, below market rents, and substantial contractually embedded NOI upside, we believe PGRE represents one of the best internal growth stories in the Office sector.

“We estimate roughly $129MM of potential cash NOI upside from current levels, which if realized through 2018 would equate to annualized NOI growth of ~9 percent. Of this ~28 percent is driven solely by embedded rents with the remainder coming from MTM and lease-up.,” according to Chao.

The $20 price target was based on the firm’s “2-year forward NOI estimates, at a 4.5 percent cap rate” and “assumes a 5 percent discount to NAV to account for earnings volatility due to the small portfolio size.”

Paramount Group recently traded at $18.07, down 1.4 percent.