The Motley Fool

3 Growth Drivers That Could Propel Prime US REIT

Prime US Real Estate Investment Trust (Prime US REIT) has proposed an initial public offering (IPO) in Singapore at a price of US$0.88 per unit. Based on its IPO price, its forecasted dividend yield for 2019 and 2020 is 7.4% and 7.6% respectively.

Prime US REIT will be listing a total of 923 million units offering 335.2 million units to the public. After digging into the REIT’s prospectus, I have compiled a list of organic growth drivers that could propel its distribution per unit (DPU) in the next few years.

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Built-in annual escalation

For starters, 98.3% of contracted leases have built-in rental escalation clauses ranging between 1.0% and 3.0% on a fixed rate basis. With the long weighted average lease expiry of 5.5 years, these built-in rental escalations will provide visible organic rental income growth for the next few years. The chart below shows the lease expiry profile of the REIT’s portfolio.

Source: Prime US REIT prospectus

From the chart, you may notice that there only 5.8% and 7.1% of leases by cash rental income that are expiring in 2019 and 2020. The leases are also well-staggered, which is also positive for the REIT.

Expiring rents below market rent

The rents expiring in 2019 and 2020 are also well below current market rents. As such, it is possible that the REIT can negotiate higher rental rates when renewing the expiring rents. The chart below shows the average expiring rent against the expected average market rent in the corresponding years.

Source: Prime US REIT prospectus

Expiring rents in 2019 and 2020 are 24.6% and 8.8% below average market rents respectively. That being said, I believe that Prime US REIT’s forecasted 7.6% DPU for 2020 has already taken the expected positive reversion rates for 2019 into account.

Rising office rents

According to Cushman & Wakefield Inc, an American commercial real estate services company, seven of the REIT’s nine primary markets are in the accelerating part of the office market cycle while two are in the growing but slowing rental part of the cycle. The chart below shows where the cities are in terms of the office market cycle.

Source: Prime US REIT prospectus

Prime US REIT, with its portfolio of class A office assets, is well-positioned to take advantage should office rents increase as expected. The chart below provides the cash rental income by primary markets.

Source: Prime US REIT prospectus

Worth noting is that Salt Lake City, the second biggest market for the REIT, is at the beginning of the accelerated rental growth cycle.

The Foolish bottom line

There are good reasons to be optimistic that Prime US REIT can continue to grow its distribution per unit (DPU) in the next few years. Besides built-in annual escalation, the recovering office rent in its primary markets and low expiring rents relative to market rents will provide significant tailwinds to the REIT’s rental income.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Jeremy Chia does not own shares in any of the companies mentioned.