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Prime US REIT IPO: 9 Things Investors Should Know

Prime US REIT, or Prime for short, launched its initial public offering (IPO) on Monday. This is the third pure-play US real estate investment trust (REIT) to list in Singapore this year, coming shortly after the IPOs of Eagle Hospitality Trust (SGX: LIW) and ARA US Hospitality Trust (SGX: XZL). However, one major difference is that Prime deals with commercial and office properties, while Eagle and ARA have hotels in their portfolios.

The REIT’s sponsor will be KBS Asia Partners Pte Ltd (KAP), which is a unit of KBS, one of the largest US commercial real estate managers with US$11.6 billion of assets currently under management. The REIT manager is KBS US Prime Property Management Pte Ltd, which is 60% owned by KAP, 30% owned by Keppel Capital Two (a wholly-owned subsidiary of Keppel Capital Management), and 10% owned by Experion Holdings, which is a wholly-owned subsidiary of AT Holdings Pte Ltd.

Shares are being offered at US$0.88 apiece, or S$1.20. The public offer closes at noon on July 15, and trading of the units are expected to commence on July 19. Here are nine interesting facts which investors should know about Prime’s IPO.

1. Prime’s portfolio consists of 11 prime Grade-A office properties. They all have freehold land titles and are located in key business districts or prominent urban centres. Eight out of the 11 properties enjoy connectivity to the light rail network within their markets, while 10 out of the 11 properties enjoy Energy Star or LEED ratings.

2. The properties are geographically diverse across the US commercial real estate market and no single primary market contributes more than 19% of the value of the IPO portfolio (as at 1 January 2019).

Source: Prime US REIT IPO Prospectus

3. The properties also provide diversified revenue streams and no single property contributes more than 15.7% to the cash rental income of the portfolio. This mitigates the risk that one property may suffer from a sharp fall in occupancy and impact the portfolio’s distribution per unit (DPU) negatively.

Source: Prime US REIT IPO Prospectus

4. Historical portfolio average occupancy numbers for all the 11 properties over the last three financial years are shown below.

Source: Prime US REIT IPO Prospectus

Note that for Tower 1 at Emeryville, the average occupancy rate for 2018 was at 62.9%, as there was a lease expiry of a tenant which occupied four stories of the property (the property has twelve stories, therefore four stories represented around 33% of the net lettable area). However, according to the prospectus, the occupancy rate was at 81.1% as of 1 January 2019, and forecast period 2019 shows projected occupancy at 94.6% while forecast period 2020 at 100.0%, signalling that the REIT manager has taken proactive steps to find tenants and is confident of filling up this vacant space.

Note that overall portfolio occupancy for the portfolio was 96.7% as of 1 January 2019.

5. The properties have a net lettable area of 3.4 million square feet and an appraised value of US$1.2 billion. This value was arrived by taking the average of two independent valuations conducted by Cushman and Wakefield and JLL Valuation and Advisory Services.

6. 98.3% of the portfolio’s leases have built-in rental escalation clauses ranging between 1% to 3% on an annual fixed rate basis. In addition, 96.9% of the leases by net lettable area are on a triple-net or modified/full-service gross basis, and this is beneficial for the REIT as it will protect it from increases in real estate taxes and property expenses (as these can be passed down to tenants).

7. There is strong positive rental income reversion potential as the current weighted average market rent is US$23.7 per square foot, which is lower than the average market rental rate of US$29.5 per square foot. Even after rental escalations kick in in FY 2020, the weighted average rental for the portfolio will be US$26.9 per square foot, which still offers an 8.8% rental reversion upside for the portfolio.

8. Aggregate gearing for the initial portfolio stands at 37%, which is below the statutory limit of 45% for REITs. This allows the REIT to have adequate debt headroom of US$177.8 million to fund future growth through acquisitions. The REIT also has an average debt tenure of around 5.6 years, and the first refinancing is only required in 2022 (around 15% of total borrowings).

9. The projected yield, on an annualised basis, for the REIT is 7.4%, and this is expected to increase to 7.6% in the forecast year 2020. Investors should note that for FY 2019, the total forecast DPU is 4.87 US cents, representing the DPU for nine months for the fiscal year from 1 April 2019 till 31 December 2019. Distributions are declared half-yearly on 30 June and 31 December of every fiscal year.

Foolish takeaway

Prime US REIT looks like an enticing opportunity for investors to gain access to prime US commercial properties. The closest peer will be Manulife US REIT (SGX: BTOU), which has seven properties in its portfolio and which offers a forward dividend yield of around 7.1% currently. Compared to Manulife, Prime is more diversified (i.e. it has more properties) and also offers a slightly higher forecast distribution yield.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Manulife US REIT. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.