Prime US REIT

Prime US REIT ("Prime" or "the REIT") is offering 335,203,200 units in its IPO at US$0.88 each (or S$1.20 per unit). The placement tranche of 318m and public offering of 16.761m units will be held concurrently. The offer will close on 15 July 2019 at 12pm and IPO proceeds will be used to fund the acquisition of the properties.

Prime US REIT comprise investors exposure to a portfolio of prime Class A Office Properties across the United States. The objective is to achieve long-term growth in DPU (distributions per unit) and NAV (net asset value). Prime US REIT is the 3rd US Office Reit to be offered on SGX after Manulife US REIT and Keppel-KBS US REIT.

I am glad to see the REIT market in Singapore developing well although the recent US Hospitality Trusts did not perform too well. 

Portfolio

The portfolio comprises of 11 freehold Class A office buildings with high occupancy rates that are located in key business districts or urban centres. A loan was used to finance part of the portfolio and the gearing ratio at IPO is around 36%.

What i like about Prime US REIT

• Quality portfolio - The portfolio comprised 11 Class A office buildings with freehold titles and high occupancy rates. The occupancy rate for 2018 is around 95.7% and that is expected to increase to 97.5% in FY2020. Except for 2 cities Philadelphia and St. Louis, the rest of the states where the properties are located seemed to be experiencing above average population and employment growth

• Well diversified tenant base - Prime is not overly-reliant on any single tenant. Top 10 tenants made up 43.5% of the portfolio with weighted average lease of 6.7 years and the largest tenant is Charter Communications and contribute around 7.9% of the rental income

• Well spread out lease expiry profile of 5.5 years - The long tenure provides income stability over the foreseeable future. That is why residential and commercial REITs command a lower interest rate than hospitality trusts.

• Organic growth is highly likely - from both built-in rental escalation clauses of between 1-3% as well as headroom for upward rental revisions

• Attractive distribution yield with long term debt maturity profile - The first debt of $67.2m is due in 2022.

• Well supported cornerstone investors  - This IPO seemed to be better coordinated where the cornerstone investors have already been properly lined up. Cornerstone investors include AT Investments, Keppel Corporation, Times Properties (SPH), Trusts of Linda Bren and Schreiber, Private Banking clients of CS and DBS and Hiap Hoe Limited.

Some of my concerns

• Tax Regulations may change - Currently US REIT investors enjoy a better yield on the basis that the distributions are not subject to withholding tax provided the largest investors holds less than 9.8% of the REIT and that certain tax regulations does not apply. If you recall, just a short while ago, Manulife US REIT and Keppel-KBS US REIT suffered from fears of 30% US withholding tax. With Donald Trump being nationalistic and antagonistic from trade to currencies to taxation, this is a risk that will surface from time to time

• ATM Applicants should be aware that the forex rate is already fixed - Similar to other IPOs, the Issuer has fixed the USDSGD rate so that applicants will not "suffer any losses" if they are not successful in the application. As such the contracted rate of 1.3636 is higher than the current spot rate of 1.3574. IPO flippers should take note that they will suffer an immediate forex loss. For applicants like myself with USD balance, i can't use my USD to apply unless it is via the placement tranche.  As such, you should apply if you intend to hold for the longer term and do not mind the USD exposure

• Long holding period before first pay out - Do note the first payout will only happen in on or before March 2020. As such, buying an existing REIT such as Manulife or Keppel KBS with known payout dates may be more beneficial

• Potential conflict of interest is real  - It is probably material enough to disclose how conflict of interest, whether with Keppel KBS US REIT or internally with other strategies managed by the same advisor will be addressed. While on paper, it looks like the concerns have been addressed, it is nevertheless raised some concerns. As we all know, there are many ways to skin a cat.

• How KBS behaved in Keppel KBS USD REIT hasn't been particularly encouraging - I invested in Keppel KBS USD REIT during its IPO and suffered through a highly dilutive rights offering. The silver lining was i took a bet and applied for more rights and in the end, came out fine as the share price recovered. Investors who did not subscribe to their pro-rata rights issue will be badly diluted. I believe this will be how they behaved going forward with regards to portfolio acquisition - except that this time, they have a bunch of higher quality cornerstone institutions and manager who may provide a better course of action than just a dilutive rights offering    

Distribution Yield

The projected yield is 7.4% for FY2019 and 7.6% for FY2020. The first distribution from listing till 31 Dec 2019 will be paid in Q1 2020.

Peer Valuation

Prime US REIT is listing at a price to book of 1.04x with a current FY19 yield of 7.4%.

According to Capital IQ, Manulife US REIT is trading at 1.05x and yield of 6.3% and Keppel KBS USD REIT is trading at 1x book and yield of 6%.

According to the latest RHB research report for both REITs, the forecasted yield is 6.8% for Manulife and 7.8% for Keppel KBS USD REIT. 

Based on the above reports, Prime US REIT seemed to be have a slight upside bias when compared to Manulife REIT and fairly priced against Keppel KBS USD REIT, although i would hazard a guess that the portfolio in the Prime IPO is a tad better than Keppel KBS USD REIT.

Other Sources of Information

A few other bloggers have done extensive research or covered more details in other aspects. You may want to refer to the postings as well.

1. Dr Wealth 
2. Probutterfly
3. Investment Moats

My Chilli Ratings

Given that this is one of the largest IPO this year, there should be ample supply to meet the demand, especially this is right after two hospitality REITs.

As you can see in the case of Eagle Hospitality REIT, the name of the sponsor is very important. While Keppel KBS-USD REIT did not help augment the Sponsor's reputation due to the super dilutive rights issue, the saving grace is that the share price has since rebounded. In addition, i think this time round, they are "wiser" to anchor more known and reputable cornerstone investors for the IPO. If you don't trust KBS, at least you should give face to the anchor investors - Keppel, SPH, Hiap Hoe etc. These anchor investors can probably help mop up some rights offering in future so that it can be less dilutive to investors. 

When compared to its listed peers, it is priced more attractive relative to Manulife REIT but a tad worse than the yield forecasted for Keppel KBS USD REIT. This is probably right as the portfolio of Prime is better given that they are all Grade A freehold office properties. The fact that this is an "office REIT" will entice more investors than "hospitality reits" as the income is more stable. I would expect Prime US REIT to be much better received than the hospitality trusts.

Assuming a fair value range of price to book at 1.0x to 1.1x and yield of 7% to 7.4%, the fair value range will be US$0.85 to US$0.93 cents. I will give it a 1.5 chilli ratings for the IPO. 

Having said that, the IPO chilli ratings is not for short term punt as it is not intended for flipping.

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