In recent years, real estate companies in the United States started recognising Singapore as an attractive REIT hub for capital raising. A slew of US commercial REITs have gone public on the SGX, offering investors unique exposure to the US property market. 

Prime US REIT (SGX: OXMU) is one such US-focused REIT that went public in a US$612 million IPO in Jul 2019.

In this article, we will examine Prime’s asset portfolio, lease profile, cash flow and gearing to determine if it’s a good dividend stock. 

Asset Portfolio

Prime owns 11 Class A office properties in nine primary markets across the United States. The buildings are found in the business district of key urban centres such as Washington DC, Atlanta, and Dallas. 

In Prime’s IPO prospectus, Cushman describes Class A buildings as ‘the most prestigious, high quality-standard, well-located buildings, typically steel and concrete construction, built or renovated after 1980’. The assets fit these descriptions, with mixed-use amenities offering office workers a ‘live-work-play’ environment. 

The portfolio has over 180 tenants, with the top ten tenants taking up 44.6% of cash rental income. The largest trade sector is finance, communications, and real estate. One key selling point is that 33.7% of assets are exposed to the Science, Technology, Engineering, and Mathematics (STEM) sector that is set for growth in the coming two years. 

Source: FY2019 Results Presentation

There is a well-staggered lease expiry, with not more than 9% of annual lease rental expiring in the next three years. This helps give some stability to the rental and distribution of the REIT in its initial years after going public.   

Source: FY2019 Results Presentation

Revenue and Net Property Income

Prime has performed well in 2019 with revenue, net income, and distribution exceeding the IPO forecast. In particular, distributable income and distribution were 7.3% and 7.5% higher than the projection. 

Do note that the FY2019 results are derived from 19 Jul to 31 Dec period. Hence, projected revenue, net income, and distribution should be more than double should we annualise the figures. 

Source: FY2019 Results Presentation

Balance Sheet and Gearing

Prime has a relatively strong balance sheet with a gearing of 33.7% and an interest cover ratio of 5.5 times. The low gearing ratio makes it easier to secure loans when required, while the interest cover ratio shows that Prime has ample cash to pay for its interest expenses, thus having a low risk of running into liquidity issues. 

Latest Acquisition

In Feb 2020, Prime announced an acquisition deal to buy over Park Tower, a class A office tower with a mixed-use retail component in Sacramento. The purchase price amounts to US$ 165 million. 

Park Tower tenants comprise mostly of government or public administration entities, which take up 48% of the total lease. This will add ‘Government’ as a new tenant trade sector to Prime, boosting the resilience of its tenancy profile. 

The acquisition would have increased Prime’s FY2019 distribution by 2.7% if it had taken place before the financial reporting period.  

Source: Acquisition of Park Tower Presentation Slide

Historical Performance

As a relatively new REIT, I am interested to know Prime’s historical performance. 

Its revenue and net property income have been rising since FY2016. Besides, Prime has managed its property expenses well to maintain a consistent net property income yield. 

Source: Self-Compiled from IPO Prospectus

The prospectus also revealed that the overall portfolio occupancy has risen from 93.2% in 2016 to 95.7% in 2018. The three largest assets by valuation:222 Main (Salt Lake City), 171 17th Street (Atlanta), Village Center Station ll (Denver), had maintained occupancy of above 90% in the past three years. 

Sponsor

KBS Asia Partners is the sponsor of Prime REIT. KBS is one of the largest owners of commercial real estate in the US that engages in proactive acquisition and asset management. It has over 28 years of experience in the industry and is currently managing $11.5 billion worth of assets. 

As seen from its website, KBS has several accolades such as being one of the 2018 Top Office Owners Globally bestowed by the National Real Estate Investor. It is also an advisor to pension funds, endowments, and private foundations.   

Valuation

Should we annualise the 3.15 US cents distribution per unit to a projected 7.3 US cents, Prime is currently trading at a yield of 10.9% based on a share price of US$0.665. This certainly seems like an attractive yield. 

Prime is trading at a price to the net asset value of 0.74 times, based on its book value of US$0.89 per share. This is a fairly substantial discount to its book value, possibly due to uncertainty surrounding the US commercial property market due to the Coronavirus. 

Peer Comparison

Prime’s same-sector peer would be the Manulife US REIT which also invests in Class A office properties in the US. 

As seen from the table, Prime is trading at a larger discount to net assets and a much higher yield compared to Manulife. However, the equity market ascribes a much larger capitalisation to Manulife. 

The discrepancy could be due to investors’ familiarity with Manulife as it has a longer listing history. The inclusion of Manulife into the FTSE EPRA Nareit Global Developed Index recently also helped raise its profile and attract more funds ownership. 

Source: Self-Compiled from corporate websites

Conclusion

Prime has delivered a good set of FY2019 results, with revenue, net property income and distribution exceeding forecast. Its high-quality assets have enjoyed rising revenue and occupancy rate historically.  

While Prime’s yield seems incredibly high now, it is due to the share price drop in-line with the broader market. It is advised that investors do not buy its shares solely based on the high yield, as its true test will be in the next two quarterly results which reflect the full impact of Covid-19 outbreak. 

I will assess Prime’s asset resilience and its management capability based on its next earnings. Hence, it shall remain in my watch list for the time being.   

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