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Prime US Reit prices IPO at US$0.88 per unit in downsized deal

KBS Realty Advisors has priced the initial public offering (IPO) of Prime US Reit at US$0.88 per unit to deliver a forecasted dividend yield of 7.4 per cent in 2019, with a reduced deal size.

The total offering size has been lowered to US$612 million from US$705 million previously, comprising 360 million cornerstone units and 335 million units for public allocation and placement.

The Reit, which owns 11 prime office properties across the US valued at US$1.2 billion, will have a market cap of around US$813 million upon its Singapore Exchange debut.

Cornerstone investors include Keppel Capital, Singapore Press Holdings (SPH), Hiap Hoe Investment and AT Investments, which is linked to India-born Singapore billionaire Arvind Tiku.

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Keppel Capital and SPH have each committed US$55 million for a 6.8 per cent stake in Prime US Reit. AT Investments has committed US$65 million for an 8 per cent stake.

Keppel Capital will take a 30 per cent stake in the Reit manager, KBS US Prime Property Management, while AT Capital will take a 10 per cent stake.

KBS Asia Partners, the Reit sponsor, will own a 40 per cent stake in the Reit manager, instead of 60 per cent as earlier indicated, as SPH, which owns The Business Times (BT), plans to acquire a 20 per cent stake in the Reit manager, subject to regulatory approval.

Prime US Reit is acquiring its IPO portfolio from the KBS REIT III fund.

KBS REIT III will make a US$201 million indirect investment in Prime US Reit concurrent with the IPO, which works out to a 24.7 per cent stake in Prime US Reit, assuming the over-allotment option is not exercised.

The properties are located across Oakland, Salt Lake City, Denver, St Louis, Dallas, San Antonio, Philadelphia, Washington DC and Atlanta.

Portfolio occupancy was 96.7 per cent as at Jan 1, with a weighted average lease expiry (WALE) of 5.5 years by net lettable area. The tenant base has largest representations from the finance, legal and communications industries.

Distribution yield is expected to rise from 7.4 per cent in 2019 to 7.6 per cent in 2020.

Some 98.3 per cent of contracted leases as at Jan 1, based on cash rental income for the month of January, have built-in rental escalation clauses, the issuer said.

Aggregate leverage immediately upon listing will be 37 per cent, up from the 35 per cent indicated earlier.

RHB analyst Vijay Natarajan told BT that he is expecting decent investor interest in the IPO. "The US commercial property market outlook remains positive, on the back of strong job creation supporting office demand, moderate supply and a low interest rate environment.

"However, investor fatigue due to the recent listings of two US hospitality Reits and the ongoing escalation in US-China trade tensions might act as potential dampeners," he said.

The IPO will also be helped by the good operational performance from Singapore's existing US-based office Reits, said Mr Natarajan.

"(Prime US Reit's) assets are Class A office buildings and seem comparable to that of Manulife US Reit. The indicative yield of 7.4 per cent is about 50 basis points higher than Manulife US Reit, but considering Manulife US Reit's well-established DPU (distribution per unit) growth track record, we believe the premium is justified."

He added: "Commercial Reits in general offer a more stable income profile compared to hotel Reits, due to the long WALE and tenant base which should offer income certainty and more comfort to investors in the current volatile environment."

DBS is the sole financial adviser, and joint global coordinator for the IPO, together with Bank of America Merrill Lynch. Joint bookrunners and underwriters include CICC, Credit Suisse, Maybank Kim Eng and OCBC Bank.