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Prime US REIT beats IPO forecast by 9% with 4Q DPU of 1.77 US cents; launches private placement to help fund Sacramento property acquisition

Stanislaus Jude Chan
Stanislaus Jude Chan • 5 min read
Prime US REIT beats IPO forecast by 9% with 4Q DPU of 1.77 US cents; launches private placement to help fund Sacramento property acquisition
After a strong 4Q, Prime US REIT is eyeing a DPU and NAV per unit accretive acquisition in Sacramento.
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SINGAPORE (Feb 12): The manager of Prime US REIT has declared distribution per unit (DPU) of 1.77 US cents for 4QFY2019 ended December 2019, some 9.0% higher than its initial public offering (IPO) forecast of 1.62 US cents.

This brings DPU for the FY2019 from July 19 to Dec 31, 2019, to 3.15 US cents – some 7.5% higher than the IPO forecast of 2.93 US cents – payable on March 30, 2020.

Prime’s portfolio of 11 office properties in the US raked in gross revenue of US$33.5 million ($46.5 million) during the quarter, 2.0% higher than the IPO forecast of US$32.9 million.

This was mainly due to higher rental income and recoveries income.

Consequently, net property income (NPI) for 4QFY2019 was 3.0% higher than forecast, at US$22.3 million.

The portfolio occupancy of PRIME remained resilient at 95.8% as of Dec 31, 2019, with approximately 98% of leases having rental escalations.

The weighted average lease expiry (WALE) is 5.1 years, with not more than 17.2% of the leases by net lettable area (NLA) expiring in any one year.

Prime’s property portfolio was revalued as of Dec 31, and recorded a net fair value gain of US$18.8 million, reflecting the improving fundamentals of US office market.

As at end December, cash and cash equivalents stood at US$37.9 million.

“We are pleased to deliver on our IPO commitments with our first full year results. The improving fundamentals of the US economy supports the sustainable growth of our portfolio both organically and inorganically,” says Barbara Cambon, chief executive officer and chief investment officer of the manager.

Park Tower acquisition

In a separate filing to SGX on Wednesday, Prime US REIT also announced it is acquiring Park Tower in Sacramento, California, US, for an estimated total acquisition cost of US$170.1 million, including the acquisition fee payable to the manager for the acquisition as well as estimated professional and other transaction fees and expenses incurred in connection with the acquisition.

The purchase consideration of the acquisition is US$165.5 million – a 2.6% discount to the independent valuation of US$170.0 million by an independent valuer Joseph J. Blake & Associates Inc as of Jan 16,2020.

The acquisition is expected to be DPU and net asset value (NAV per unit accretive. On a pro forma basis, the acquisition would have lifted DPU for FY2019 by 2.7% to 3.24 US cents and NAV per unit by 0.1% to 0.893 cents.

NPI yield of the property for FY2019 is expected to be approximately 6.9%.

Park Tower comprises a 24-storey Class A office tower and a five-storey mixed use retail/parking garage.

Built in 1961, the freehold property has a NET of 489,171 sq ft. The property currently has 43 tenants, including the State of California, ICF Consulting, Deloitte and Regus.

Park Tower’s current occupancy stands at 92.2% with a WALE by NLA of 5.6 years. The manager says this provides opportunity for rental upside as the vacant space in the property is progressively leased up over time.

The manager say the acquisition will allow Prime US REIT expand its footprint to Sacramento – one of the fastest growing regions in terms of population and one of the strongest economies in California with an annual growth rate of 3.2% from 2013 to 2018. For comparison, the US grew at an average of 2.3% over the same period.

The manager adds that strong demand for Class A office space in Sacramento has also translated into healthy rental growth.

The asking rent for Class A office space for the competitive micro market in Sacramento has grown by 17.4% from 2014 to 2018, while the overall vacancy rate for the competitive micro market is at only 4.7% – far below the national vacancy rate of approximately 13.0%.

Following the acquisition of Park Tower, the asset diversification will see no single market contribution more than 13.0% of Prime US REIT’s cash rental income.

The total acquisition cost will be funded by a combination of loans, and issuance of new units in Prime US REIT.

Private placement

The manager on Wednesday also launched a private placement of approximately 106.05 million new units in Prime US REIT to institutional and other investors – representing an increase of 11.5% over the total number of units currently in issue.

The proposed issue price range of between 92.8 US cents and 95.7 US cents per new unit represents a discount of between 6.0% and 8.8% to the volume weighted average price (VWAP) of US$1.0179 per unit on Feb 11, the preceding market day before the placement agreement was signed.

The issue price will be determined by the manager as well as the joint lead managers and underwriters – DBS Bank and Credit Suisse (Singapore) – following a book-building process.

The manager expects to raise gross proceeds of no less than around US$100.0 million in the private placement, with the option to increase the size of the private placement by up to an additional US$20.0 million.

Around 95.4% of the gross proceeds of the private placement, or approximately US$95.4 million, will be used to partially fund the Park Tower acquisition, while the remainder will be used to pay the estimated fees and expenses.

“We aim to expand our premium portfolio of high-quality Class A office assets, maintain a balanced business model and leverage on our expertise to enhance unitholder value in the long-term,” says Cambon.

Units in Prime US REIT closed at US$1.02 on Tuesday.

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