Prime US Reit seeking assets in growing job markets

FOR property veteran Barbara Cambon, buildings are not just a heap of bricks and concrete. Instead, they are dynamic structures where people learn, work, play and dream.

"Real estate is viewed as solid structures, but we must also understand the dynamism and diversity that goes on within these physical assets, and how they can meet the constantly evolving needs of their occupants," said the chief executive officer of the manager of SGX-listed Prime US Reit (Prime).

Ms Cambon, who began her real estate career in the early 1980s, is no stranger to forces of transformation within the industry. "The way that tenants use our buildings will continue to change, as will the type and nature of the tenants who want to use our buildings," she added.

The 65-year-old, who is also chief investment officer of the manager, has accumulated experience in institutional real estate advisory, including roles with a US-based private real estate investment firm and real estate consulting company.

Armed with a Master of Business Administration qualification from Southern Methodist University, Ms Cambon also holds a Bachelor of Science degree in Education from the University of Delaware.

She sits on the Policy Advisory Board of the University of San Diego Burnham-Moores Real Estate Institute. Previous board positions include the Pension Real Estate Association, National Council of Real Estate Investment Fiduciaries and Amstar Advisers.

"Helping clients identify how real estate fits their needs, how they should build their investment platforms, as well as develop the fundamentals of their asset selection strategies - all of that has shaped my experience," she said.

Today, those skillsets stand Ms Cambon in good stead to drive expansion at Prime.

Diversified portfolio

Listed on July 19, 2019 on SGX Mainboard, Prime is focused on stabilised, income-producing US office assets. It owns a high-quality, geographically diversified portfolio of 11 prime and freehold office properties, strategically located in nine primary markets in the US, with a total appraised value of approximately US$1.25 billion.

The portfolio is well-diversified - no primary market contributes more than 14.6 per cent, and no single trade sector accounts for more than 16.6 per cent, of total portfolio value. Portfolio occupancy rates remain high at over 95 per cent, with a long average weighted average lease expiry (WALE) of 5.1 years as at Dec 31, 2019.

The Reit has an average debt to maturity of 5.2 years at a weighted average interest rate of 3.3 per cent. Its gearing ratio remains healthy, at 33.7 per cent.

Until recently, Prime was trading above its initial public offer price of 88 US cents. As at March 27, however, it closed at 64 US cents. For its fourth quarter ended Dec 31, 2019, the Reit posted a distribution per unit (DPU) of 1.77 US cents, 9.3 per cent higher than its IPO forecast of 1.62 US cents.

"We're focused on the markets where corporate America wants to grow," Ms Cambon said. "Employees of today are looking for live-work environments with shorter commutes, and those that include a balanced work-play dynamic."

Prime is focused on identifying US markets with signs of robust jobs expansion, and large numbers of highly educated employees. Other criteria include areas with higher than national average population growth rates, as well a relatively lower cost of living to attract in-migration of talent.

Corporations are no longer just focusing on major gateway cities. This can be seen from how Salt Lake City has grown in importance for Goldman Sachs, or how Amazon nixed New York in favour of Northern Virginia for its HQ2, she noted.

Key factors

"Key factors that matter today include a lower cost of living, a balanced live-work-play environment, as well as proximity to major universities with access to a talented workforce."

Last month, Prime acquired the Park Tower office building, situated in the prime central business district (CBD) of Sacramento, California, for US$165.5 million. The property is a freehold, 24-storey Class A office tower with a five-storey, mixed-use retail or parking garage, comprising a net lettable area of 489,171 square feet.

"Sacramento is a new market that diversifies our geographical exposure, and introduces a new industry sector - government - that adds stability to the portfolio," she pointed out. "The real estate market in California's capital is also robust, with low vacancy rates, healthy rent growth, high demand and limited new supply."

Prime's maiden acquisition is yield-accretive, boosting its portfolio value to approximately US$1.42 billion. On a pro forma basis, it provides an uplift of 2.7 per cent and 0.1 per cent to DPU and net asset value (NAV) respectively.

To further grow these two closely watched industry metrics, the Reit will focus on both organic and inorganic strategies. "For our portfolio, 98 per cent of the leases have built-in rental escalations that range from one per cent to 3 per cent," Ms Cambon said.

Active asset management is another route. "The construction of our portfolio is focused on resilience and stability - we want to ensure we don't have the bulk of our leases maturing in the space of any one year, and there is diversity in terms of tenant-industry mix," she added.

"We also want to manage the space dynamics within each asset - for tenants looking to grow within the building, we want to accommodate their needs, and at the same time, help other tenants whose needs may be best-served by moving elsewhere."

All of these require a thorough understanding of the office real estate space, and application of the right criteria to asset selection, she added.

As for growth via acquisitions, Prime is targeting yield-accretive assets in strategic markets where US corporations are expanding their operations. "We're able to leverage on the organisational resources of our sponsor, KBS Asia Partners, whose shareholders include the founding members of KBS," Ms Cambon said.

Resilient office market

KBS is one of the largest US commercial real estate managers with more than US$41.8 billion of transactional volumes since its inception in 1992. "Having that depth of experience in these markets and being well-known in the community, they can identify and open up suitable opportunities for us."

Apart from its sponsor's support, Prime also has flexibility to focus on assets owned by third parties, as in the case of the Sacramento Park Tower acquisition, she added.

With the spread of Covid-19, Prime is closely monitoring the pandemic's impact on the US economy. Several major cities, including New York, have ordered schools, bars and restaurants to shut, while some retailers have closed stores, as the authorities urged social distancing in a bid to stem the outbreak.

The office market, on the other hand, has been resilient. "There's a limited supply of Class A offices, with the key office-using sectors of financial services, professional services and information increasing jobs by 150,000 in the fourth quarter of last year," Ms Cambon noted. "With a similar amount of new supply added, vacancy rates remained stable in view of the tight labour market."

Segments that enjoy long-term leases may see less of an impact from the pandemic, the Washington, DC-based National Association of Real Estate Investment Trusts (Nareit) said in a recent blog post.

"An apartment Reit with low vacancy rates will still have their tenants paying rent, and may not suffer any lost income. Similarly, an office Reit with investment grade tenants is not likely to experience a drop in occupancy or rent receipts," it added.

Meanwhile, the tenant-industry mix in Prime's portfolio is evolving. "In the past, financial services tenants made up the majority of our tenants. But in the past year, technology has seen the biggest take-up rates for office space among all sectors, and is expected to continue its outperformance through 2020," Ms Cambon said.

This benefits Prime, which has a more than 37 per cent exposure to the rapidly expanding STEM (Science, Technology, Engineering and Mathematics) and TAMI (Technology, Advertising, Media and Information) segments.

Nonetheless, one of the biggest challenges Prime faces comes from identifying and meeting continually changing needs of tenants within its portfolio. "We need to understand how space use is changing, and provide our tenants with the most contemporary amenities to keep our buildings modern and fresh."

Examples include conferencing facilities for remote workers, as well as strategically located fitness centres, bicycle parking and storage lockers for those with more active lifestyles.

"There's also increasing demand for collaborative spaces, such as tenant lounges, where staff can relax, hang out or work with their laptops near their offices," she added.

And when Ms Cambon is not immersed in the day-to-day operations of the Reit, she enjoys interacting with the young - and hopefully - future leaders of the real estate industry. "One of the cool things I get to do is to teach a class," she smiled, referring to her role on policy advisory boards of US educational institutions.

To the young, she has this advice to offer: Stay current as the world continues to evolve, and the industry along with it. "The next generation will have access to more resources, such as technology and knowledge, compared to the previous generation," she said. "So the onus is on you to pull together all these experiences, and harness available resources, to become the best operator you can be of any asset."

Education should also be a priority, she added. "Learning never stops, whether at an individual or industry level. So make sure you are constantly learning, and learning something new every day."