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5 Things To Like About Prime US REIT’s Portfolio

Prime US REIT is set to be the third pure-play US real estate investment trust (REIT) to list in Singapore this year. The REIT, which will own 11 class A office buildings across 9 cities in the US has priced its units at US$0.88, which translates to a 2019 yield of 7.4% and a price-to-book ratio of 1.05.

In two earlier articles here and here, I discussed some of the growth drivers and potential risks that I didn’t like about the REIT. In this article, I’ll highlight five things investors should like about Prime US REIT’s initial public offering (IPO) portfolio.

100% Freehold property

Prime US REIT has a portfolio that is 100% free hold. Freehold properties are not subjected to further payments to renew land leases. As such, investors need not worry about expiring land leases in the future.

100% Class A office buildings

Class A office buildings are considered the highest quality office spaces on the market. These buildings are usually newly constructed, have best-in-class facilities and amenities, good locations and have rental rates that are higher than the city’s average.

These properties are also sought after by highly-reputable companies, which means that credit risk is low.

Diversified portfolio

While the REIT is a pure-play US office REIT, its portfolio is well-diversified across nine cities. No single market makes up more than 20% of the REIT’s appraised value. 

Source: Prime US REIT prospectus

Its cash rental income is also well spread across each of its 11 properties.

Source: Prime US REIT prospectus

Staggered lease expiry

The REIT also has a staggered lease expiry. In 2019, 2020 and 2021, the leases expiring make up 5.8%, 7.1% and 6.5% of cash rental income, respectively. It also boasts a long weighted average lease expiry of 5.5 years, with 98.3% of contracted leases having built-in rental escalations.

Source: Prime US REIT prospectus

Rising office prices

Its portfolio could also increase in value. According to Cushman & Wakefield, an American real estate services company, the availability of capital in the US will continue to support the US real estate market and the US economy. New office supply is also expected to decrease in 2019 to 55.7 million square feet from 2015 to 2017, which had new supply of between 51.8 million and 54.7 million square feet.

More importantly, its IPO portfolio is located in markets that have robust economic and employment growth. The chart below shows employment growth in the nine markets that Prime US REIT has assets in. Only Philadelphia and St Louis have employment growth rates that have historically been below the US average.

Source: Prime US REIT prospectus

The Foolish bottom line

As you can see, there are many things to like about Prime US REIT’s IPO portfolio. However, beyond its portfolio, investors should also consider other aspects of the REIT like its capital structure, distribution yield and propensity for growth.

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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.