SINGAPORE (May 15): Prime US REIT has a focus on stabilised income-producing office assets in the US. Prime offers investors a unique exposure to a high-quality, geographically diversified portfolio of 12 prime and freehold office properties, strategically located in 10 primary markets in the US, with a total appraised value of US$1.42 billion ($2 billion) as at March 31, 2020.
What are some of Prime’s notable developments or achievements since the IPO?
Prime has achieved several milestones since our listing in July 2019. Key highlights for 1Q2020 include:
• Outperformance of gross revenue and net property income (NPI) against the IPO projection for 1Q2020. Gross revenue exceeded IPO projection by 4.1% (US$35.1 million vs US$33.7 million) and NPI exceeded IPO projection by 6.7% (US$23.5 million vs US$22.0 million). Distributable income exceeded the IPO projection by 12.9% (US$17.6 million vs US$15.6 million).
• Inclusion into MSCI Singapore Small Cap Index post-listing on Nov 26, 2019. We believe the inclusion will improve our trading liquidity and visibility within the investment community.
• Maiden acquisition of Park Tower in Sacramento for US$165.5 million, funded by our first private placement in February 2020 which raised US$120.0 million, with the upsize option exercised. It was 4.8 times subscribed at the top end price of US$0.957 per new unit, driven by strong demand from long-only institutional investors, private wealth clients and multi-strategy funds.
What is Prime’s investment proposition?
• Premium portfolio of high-quality office assets: 12 Class A freehold office properties deliver strength through diversity.
• Resilient business model: Strong geographical and sector diversification, long WALE with fixed annual rental escalations and conservative debt profile.
• Informed decision-making: Proactive asset management and real-time in-depth intelligence on growth opportunities.
• Management bench strength: Depth of expertise of US real estate ecosystem and established track record.
• Exposure to strategic markets: Executing on opportunities for growth, where corporates are expanding into with priorities on talent attraction and retention.
How is Prime’s tax structure like and what is its impact on unitholders?
We have an efficient tax structure, which allows us to qualify for US portfolio interest exemption where our unitholders are not subject to tax in both Singapore and the US, provided they establish their status for the United States Foreign Account Tax Compliance Act (FATCA) purposes and their eligibility for exemption from US withholding tax on US portfolio interest income earned by providing an applicable US IRS Form W-8 and other certification or information that is requested.
Following the regulations issued on April 7 relating to the US 2017 Tax Legislation, there is no impact on our tax structure and distributable income. We will be winding up the two dormant Barbados-incorporated entities held by Prime US REIT S2 for US tax purposes this year.
Can you elaborate on Prime’s tenant portfolio?
Our portfolio is well-diversified across geography and sectors. No primary market contributes more than 13.5% and no single trade sector contributes more than 15.1% of our total appraised portfolio value as at March 31.
We have 238 tenants exposed to growing sectors such as Science, Technology, Engineering and Math (STEM) and Technology, Advertising, Media and Information (TAMI), with a high portfolio occupancy rate of 94.9% and a long average WALE of 4.9 years as at March 31.
We have strong tenant relationships to support our high retention rate, providing rental income stability as increases in tax and expenses are borne by our tenants. Furthermore, approximately 98% of our leases have built-in rental escalations ranging from 1% to 3%, supporting good potential for rental growth.
How does Prime manage its debt profile and ensure the sustainability of its distributions?
As at March 31, we maintain a conservative debt profile and a prudent capital management strategy. We have a total debt maturity profile of US$488 million with a weighted average tenor of 4.8 years.
With a gearing ratio of 33.7%, our debt maturity schedules are well-distributed to provide optimal returns to unitholders and have the flexibility to deploy for future capital expenditures or acquisitions.
We are on track for 100% payout of distributable income for FY2020 on a semi-annual basis, and to distribute at least 90% of annual distributable income from FY2021 onwards.
Given the increasing competition for quality assets amidst a low interest rate environment, what is Prime’s growth strategy?
Leveraging on the strength of strong relationship with the banks and utilised our strong credit profile, we were able to access a weighted average interest cost of 3.3% as at March 31. We then entered into a new agreement on April 30 to restructure our existing interest rate swaps to lower this to 2.8% which will provide an uplift to distributable income and support our growth strategy.
We will optimise our capital allocation to leverage and grow sustainably, while diversifying our tenant, geographic and net property income. We will also focus on DPU-and NAV-accretive acquisitions on both KBS REIT III and third-party assets in an opportunistic and astute manner that maximises value for our unitholders.
What is the rationale behind the selection of markets Prime is looking to diversify into?
Market and asset selection is a key consideration in our inorganic growth strategy. Some factors which we believe will support demand-supply dynamics for prime office space are:
• Growing economy supported by highly educated workforce and investments
• Robust job growth in private or public sectors, with the support of a strong education sector
• Higher than national average population growth rate • Relatively lower cost of living to attract in-migration of talent
Can you elaborate more on your maiden acquisition of Park Tower in Sacramento?
Park Tower is a Class A property located in a prime CBD location in California’s capital, Sacramento, which we believe is poised to be one of the country’s robust real estate markets, underpinned by low vacancy, healthy rent growth, high demand and limited new supply. It also diversifies our geographical exposure and introduces a new industry sector — government — which contributes up 4.2% of Prime’s rental income and adds stability to the portfolio.
The acquisition is yield accretive and increased our portfolio value 13.6% to US$1.42 billion. Alongside the acquisition, we also issued a private placement that raised US$120 million which diversified unitholder base and improved trading liquidity. Park Tower contributed 5.5% of our NPI and 9.4% of our total cash rental income for 1QFY2020.
What is Prime’s acquisition strategy and criteria?
We focus on yield-accretive acquisitions in strategic markets where corporates are expanding into.
Our shareholders include founding members of KBS, who are one of the largest US commercial real estate managers. We have an asset allocation policy that clearly outlines potential asset acquisitions that are:
• Class A office building • Purchase price of at least US$125.0 million
• Average occupancy of at least 90% for the next two years based on contractual in place leases
• Stabilised property investment yield DPU-accretive would be offered first to Prime US REIT
• While we have the support of our sponsor, we also retain the flexibility to focus on assets identified by our sponsors or are third-party owned, such as Park Tower.
How does Prime plan to sustain performance in the slowing economy and what is your outlook for the sector?
We are cognisant of the challenges which Covid-19 brings and the uncertainty that it creates. While our portfolio assets are located away from the core outbreak zones, we are closely monitoring developments across all our markets. Our properties remain open and accessible, although the health and safety of tenants are of utmost priority and strict protocols are in place and rigorously maintained across all assets.
We are also attentive to the needs of tenants that are facing financial uncertainties and are working with them during the time of mandated business closures that directly impact their operations in the building.
We have 33.4% exposure in the growing STEM/TAMI sectors which have been and are expected to be key drivers of demand for office space in the near term. Our assets are situated in key markets with lower population density and live-work-play environments, and these attributes may serve to shape office space trends in the medium term as companies address social distancing and other health and safety measures.
Emelia Tan is a research analyst with Singapore Exchange
