RHB Group Research is positive on Prime US REIT’s acquisition of two properties in San Diego and Florida for US$245.5million ($330.2 million), along with its US$80 million private placement to partially finance the acquisition.
See also: Prime US REIT acquires offices in San Diego and Florida for US$246 mil, launches US$80 mil private placement and Prime US REIT issues 98.8 mil new shares under private placement, raising US$80 mil
The remainder of the acquisition will be funded by debt. Management has guided that the deal will result in distribution per unit (DPU) accretion of 2.4%, based on pro-forma FY2020 ended December financials.
RHB analyst Vijay Natarajan believes the new assets, both Class-A offices, provide the REIT with the right balance between growing its exposure to high-growth sectors and new markets along with providing income stability.
“The yield-accretive acquisition, along with associated fund-raising, should improve trading liquidity and help it inch closer towards major index inclusions – which should narrow the trading discount,” he adds in a June 25 research note.
Prime US REIT is currently trading at an "attractive" one time P/BV, offering around 8% FY2021 yield.
Natarajan has kept his “buy” rating on Prime US REIT with a higher target price of US$1.03 from US$1 previously, on the back of FY2021-2023 DPU forecasts that have been raised by 1%-3%.
The way he sees it, the acquisition will help the REIT diversify its exposure to “imminent high-growth sectors” including health sciences, technology and wealth management.
He also highlights that both properties have average in-place rental rates at 7%-10% discount to asking rates, as well as built-in rental rate escalations of around 3% per annum. “The assets’ long WALE of >6 years and limited near-term lease expiry (none in 2021) provide added comfort in navigating short-term uncertainties,” he adds.
On the San Diego asset, Sorrento Towers, Natarajan highlights that the office lies in Sorrento Mesa, San Diego’s technology and life science hub, with anchor tenant Dexcom (a healthcare service provider) occupying half of the total net leaseable area (NLA). “Note that Dexcom expanded its office space in the building in the middle of the COVID-19 pandemic last year, and also has the right to increase its leased space further up ahead,” he remarks.
The Florida asset, One Town Centre, is located in Boca Raton, one of the wealthiest growing enclaves in the US. Bank of America Merrill Lynch is the anchor tenant, taking up c.34% of total NLA, followed by Raymond James.
Natarajan also points out that both assets’ purchase price per square (psf) foot is well below their estimated replacement cost, with Sorrento Tower at US$439 psf versus replacement cost of US$700 psf) and One Town Centre at US$520 psf versus replacement cost of US$650 psf.
He also notes that gearing will remain “modest” at 39% post-acquisition.
As at 3.19pm, units in Prime US REIT are trading at are down 2 US cents or 2.27% lower at 86 US cents.
Photo: Prime US REIT
