Target Price*US$ 1

Recomendation**BUY

 

THE manager of Prime US Reit has agreed to acquire two properties in the US for US$245.5 million, with the purchase to be partially funded through a private placement exercise to raise gross proceeds of at least US$80 million.

 

Comprising two freehold seven-storey Class A office towers, Sorrento Towers sits above a three-level podium garage at 5355 and 5375 Mira Sorrento Place, San Diego, California, and will be acquired by the real estate investment trust (Reit) at its valuation price of US$146 million.

 

It was built in 1989 with its last refurbishment completed in 2020, and comes with a net leasable area (NLA) of 296,327 square feet (sq ft) as well as 1,052 parking lot spaces at 3.9 lots per 1,000 sq ft.

 

As at March 31, 2021 the property is 95.6 per cent occupied by 11 tenants and has a weighted average lease expiry (WALE) by NLA of 6.6 years.

 

The other acquisition target is One Town Center, a freehold 10-storey Class A office tower with a five-storey attached parking garage in Boca Raton, Florida. The property will be sold to Prime US Reit at US$99.5 million or at a 2.5 per cent discount to its US$102 million valuation as at June 8, 2021.

 

Built in 1991, One Town Center' s last refurbishment was also completed in 2020. Its parking garage component features 435 lots in addition to 274 surface parking lots. Together they span 3.7 parking spaces per 1,000 sq ft. As at March 31, 2021, the property has a WALE of 6.2 years by NLA of 191,294 sq ft, and its occupancy stands at 94.7 per cent with a total of 14 tenants.

 

In a media briefing following the announcement, the manager' s chief executive and chief investment officer Barbara Cambon highlighted the two acquisition targets as an opportunity to enhance the Reit' s portfolio exposure to both the technology industry and the financial services sector.

 

She observed a trend of increasing office-using jobs within the life sciences and tech sector within the San Diego area where a " highly-educated workforce" is also located, in her view. " Growth of employment, particularly technology, is something that we found equally attractive as we see it impacting the leasing profile for Sorrento Towers positively," said Ms Cambon.

 

Medical device firm Dexcom currently occupies about 50 per cent of Sorrento Towers' NLA, notably upon renting three additional floors after its tenancy was first established in 2018.

 

She highlighted an attractive business climate in Florida' s Boca Raton due to the absence of state income tax. With a " disproportionate amount of wealthy residents" in the city, Ms Cambon noted an increasing demand for financial services, which is the primary activity of the tenancy profile of One Town Center, whose anchor tenants are Bank of America Merrill Lynch and Raymond James.

 

Demand for office space in the area is increasing and putting upward momentum in market rent growth, added Ms Cambon, noting that developments in the area cater more to the multi-family and residential than the office real estate market.

 

" We see positive rental reversion potential at Sorrento Towers and at One Town Center. One of the strategies underway is to build a series of smaller move-in ready suites to cater to tenant demand for smaller space. Two letters of intent have been signed and at rents that even exceed our underwriting expectations," she said.

 

Prime US Reit' s manager intends to partially finance its intended acquisition of these two assets through the launch of a private placement exercise that will raise no less than US$80 million.

 

In a separate announcement on the same day, the manager gave an indicative issue price range between 79.7 US cents and 82.2 US cents. This represents a discount of between 5.8 per cent and 8.6 per cent to the volume-weighted average price (VWAP) of trades in Prime US Reit' s units done on Wednesday, up to the time the placement agreement was signed.

 

Offer of the new units under the placement will be made to institutional and other investors, and these units will only be offered and sold outside of the US in offshore transactions, in compliance with Regulation S under the Securities Act.

 

Assuming 98.9 million new units are issued at the mid-point of the indicative price range to raise gross proceeds of US$80 million, an estimated US$78.1 million or 97.6 per cent of the gross proceeds will go to partially fund the acquisition of the two properties. The remaining US$1.9 million or 2.4 per cent of gross proceeds will be used to pay the estimated fees and expenses incurred from the fundraising exercise.

 

For illustrative purposes, the manager estimates Prime US Reit' s FY2020 distribution per unit (DPU) would have been 7.11 US cents instead of 6.94 US cents had the acquisitions been completed on Jan 1, 2020. Net asset value of the Reit would have been 0.85 US cent post the acquisition instead of 0.86 cent on the assumed enlarged unit base.

 

The Reit manager intends to finance the remaining cost of the US$245.5 million asset purchase by using two new loans secured by the acquisitions, on top of an existing credit facility with an aggregate amount of US$169.6 million.

 

Maybank Kim Eng is positive on the deal and expects the properties&rsquo resilient tenancies to strengthen the Reit&rsquo s assets under management (AUM) growth profile. The research house has a &ldquo buy&rdquo call on the Reit with an unchanged US$1.10 price target, as it maintains DPU estimates pending the deal closure. 

 

" The freehold office properties are well-sited in attractive sub-markets, and backed by strong attributes&hellip The favourable lease structures and longer WALEs should reinforce (Prime US Reit&rsquo s) DPU visibility, while rising leasing momentum suggests further positive rental reversions,&rdquo said analyst Chua Su Tye in a report on Thursday. 

 

In his view, Sorrento Towers&rsquo US$493 per square foot (psf) implied transaction value is &ldquo undemanding&rdquo against a US$700 psf replacement cost, and should support upside to both its occupancies and rents. 

 

The analyst also believes that amid limited new office supply due to high development costs, expansion and relocation activities should cushion One Town Center&rsquo s occupancies and support upside to the property&rsquo s rents, which are currently 7-10 per cent below market rate. 

 

Noting that the acquisitions are accretive at 0.7 to 2.4 per cent, Mr Chua expects the acquisitions to boost Prime US Reit&rsquo s free-float market capitalisation by 24 per cent to S$500 million. This will place the Reit closer to its medium-term target for inclusion on the FTSE EPRA Nareit Index, he added.