Prime US Reit to buy first property post-IPO, Q4 DPU up 9% against forecast

Singapore

PRIME US Reit is shelling out US$165.5 million for a US property located in Sacramento, California - its first property acquisition following its initial public offering (IPO) in July 2019.

The real estate investment trust (Reit) has entered into a purchase agreement with GV/HI Park Tower Owner to acquire the property, with the purchase price of US$165.5 million representing a 2.6 per cent discount to the property's independent valuation of US$170 million as at Jan 16.

The building - called Park Tower, is a freehold 24-storey Class A office tower and five-storey mixed-use retail or parking garage with a net lettable area (NLA) of 489,171 square feet. The property has an occupancy of 92.2 per cent, with 43 tenants and a weighted average lease expiry by NLA of 5.6 years, as at Jan 1.

It is located three blocks from the State Capitol buildings and two blocks from shopping and entertainment complex Downtown Commons and indoor arena Golden 1 Center.

The estimated total cost of the proposed acquisition is about US$170.1 million, comprising the US$165.5 million purchase price, a US$1.7 million acquisition fee to be paid to the manager in cash, and estimated professional fees and other transaction fees and expenses of around US$3 million. The latter includes financing and equity fundraising related expenses, due diligence cost, land transfer taxes and costs to be incurred in relation to the valuation.

The proposed acquisition will allow Prime US Reit to expand its footprint to Sacramento, following which no single market will contribute more than 13 per cent of the Reit's cash rental income, the manager added.

Yields from the the property will also be further enhanced by low cost of borrowing of 2.6 per cent per annum for the proposed acquisition. The acquisition is also expected to have a distribution per unit (DPU) accretion of 2.7 per cent and net asset value per unit accretion of 0.1 per cent.

The proposed acquisition will be financed by a combination of loans and the issuance of new units in the Reit via a proposed private placement. In a separate filing, the manager said it had raised US$120 million in gross proceeds from the private placement.

In a media briefing, Barbara Cambon, chief executive officer and chief investment officer of Prime US Reit's manager, said the primary objective of the placement is to increase investor base and improve the Reit's free float by around 32.6 per cent to US$400 million, from S$300 million. This will potentially improve the trading liquidity of the units.

New units in the proposed private placement were pitched at between US$0.928 and US$0.957 apiece. The final price came in at the top end of the range after a book-building process.

The issue price represents a discount of 2 per cent to the adjusted volume weighted average price of US$0.9768 per unit for trades done on Feb 11.

Some US$115 million of the gross proceeds will be used to partially fund the Park Tower acquisition, while around US$5 million will be used to pay estimated fees and expenses, including land transfer taxes, professional fees and expenses, related to the proposed acquisition and private placement. Ms Cambon said she was encouraged by the overwhelming support shown to the investment proposition.

The new units, which are expected to be listed on Feb 21, were offered to institutional and other investors. DBS Bank and Credit Suisse (Singapore) were the joint lead managers and underwriters for the private placement.

In connection with this, Prime US Reit's manager intends to declare a cumulative distribution of the distributable income which consists of a distribution from July 19, 2019 (Prime US Reit's listing date) to Dec 31, 2019, and a distribution for the period from Jan 1 to Feb 20, 2020.

DPU under the cumulative distribution is estimated to be 4.11 US cents, with the actual amount to be announced after the finalisation of the Reit's management accounts for the relevant period.

News of the acquisition follows the Reit's fourth quarter and full year results ended Dec 31. Prime US Reit posted a 9 per cent rise in its DPU to 1.77 US cents, from its IPO forecast of 1.62 US cents.

For the fourth quarter, the Reit's gross revenue rose 2 per cent to US$33.5 million from a forecast of US$32.9 million on higher rental income and recoveries income. Net property income (NPI) grew 3 per cent on the year to US$22.3 million for the quarter, from a forecast of US$21.6 million.

Income available for distribution was US$16.4 million, up 8.8 per cent from a forecast of US$15 million. The distribution will be paid out on March 30, after books closure on Feb 20.

For the full year ended Dec 31, DPU was 7.5 per cent higher than forecasted at 3.15 US cents. Income available for distribution was 7.3 per cent higher than forecasted at US$29.2 million, while gross revenue was 2.2 per cent higher than forecasts at US$60.7 million. NPI rose 2.9 per cent higher than forecasted to US$40.2 million.

Occupancy rate for the Reit stood at 95.8 per cent for fiscal 2019, with around 98 per cent of leases having rental escalations. Weighted average lease expiry was also at 5.1 years, with no more than 17.2 per cent of leases by NLA expiring in any one year. Aggregate leverage as at Dec 31 was at 33.7 per cent.

Mainboard-listed Prime US Reit called for a trading halt on Wednesday morning before the market opened. The counter closed flat on Tuesday at US$1.02 on a cum-dividend basis, before the results were released.

Prime US Reit's manager KBS US Prime Property Management, is an associate company of Singapore Press Holdings - which publishes The Business Times.