Is Prime US REIT worth a second look? | ZUU Investing idea
Prime US REIT debuted in early July this year, with a portfolio of eleven Class A freehold office properties in the US, spread over 9 states.
It was the third US focused REIT to list this year – after ARA US Hospitality Trust and Eagle Hospitality Trust -and it was also the third US office REIT listed in Singapore. Manulife US REIT listed in 2016 and Keppel-KBS US REIT listed in 2017.
Prime’s performance during its debut was underwhelming, closing at its IPO price of 88 US cents. The stock currently trades at 90 US cents.
Could the stock be worth a second look? Maybank KE Research initiated coverage for Prime US Reit in early September with a “buy” recommendation and a target price of US$1. Here’s what Maybank KE research analyst Chua Su Tye likes about it.
1. Diversified portfolio
Chua says that Prime’s 11 office properties are located in nine US cities with “low tenant concentration risks” reducing the REIT’s exposure to downturns in any single market.
What’s more, its tenants mix is also well diversified, with no single industry accounting for more than 16.5% of its rental income, and its top 10 tenants representing just 43.5% of its rental income.
2. Organic income growth
The majority of Prime’s leases – 98.3% to be exact – have built in rental escalations of 1% to 3%. As such, Chua is expecting Prime to report organic income growth over the next 2 years.
“The majority of its properties are located in cities with favourable office demand / supply dynamics. With market rents at 24.6% and 8.8% above expiring rents in 2019E and 2020E respectively, we see the potential for positive rental reversions,” said Chua.
On top of that, the majority of Prime’s leases are signed on a “triple-net or modified full-service gross basis”. That means any increase in property taxes and operating expenses will be borne by tenants.
3. Acquisition growth potential
Prime’s sponsor is KBS Asia Partners, which is linked to KBS Realty Advisors founded by Peter Bren and Charles J. Schreiber. Chua notes that Prime does not currently have any properties designated for right of first refusal (ROFR) acquisition from its sponsor, but still believes Prime could “selectively acquire assets from its sponsor”.
“Apart from assets that would be injected into Prime, its sponsor currently has another USD11.6b worth of assets under management,” says Chua. “We also believe Prime can tap its sponsor’s expertise and deep network in the US for third-party acquisitions.”
4. Favourable debt profile
90% of Prime’s debt is presently locked at fixed rates, with a long weighted average tenure of 5.6 years, which Chua considers a “favourable debt profile.
“This means its exposure to higher interest rates will be limited to incremental debt drawn down to fund capex and when refinancing, with the first term loan due in 2023,” notes Chua.
5. Efficient tax structure
In a nod to its closest peers – Manulife US and Keppel-KBS US Reit – Prime’s tax structure reduces cash taxes payable, and provides more income for distribution to its unitholders, according to Chua.
6. Compelling valuations
At present, Prime is trading at about 7% DPU yields for FY2020, compared to Singapore office REITs which trade between 4.2% and 5.9% yields, and other US office REITs trading between 2.8% and 5.6%.
“At our target price, Prime would trade at a 6.6% yield, more than 5.0% above that of the 10-year US government bond,” concludes Chua.
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