Prime US REIT IPO Evaluation – 7.6% Yielding Class A Workplace Portfolio

Prime REIT. Prime REIT. Prime REIT.

For those who say it quick sufficient, and repeat it typically sufficient it turns into Prime Rib, Prime Rib, Prime Rib.

Not too way back, Keppel Capital partnered with Peter M. Bren and Charles J. Schreiber, Jr’s KBS Realty Advisers to listing a Grade B Workplace REIT referred to as Keppel KBS in Singapore.

Keppel Capital and KBS Asia Companions (KAP) have lodged their prospectus and can go forward to listing their Grade A Workplace REIT referred to as Prime US REIT.

This text will undergo what I take into consideration this REIT.

The Provide

From what we perceive, there shall be a Placement and public supply at a value of US$zero.88.

There shall be a complete of 923 million models.

The breakdown:

Placement and Public Provide: 335 mil unitsKBS REIT III: 228 mil unitsCornerstone Traders: 360 mil unitsAT Investments Restricted: eight% of REITKCIH: 6.eight% of REITThe Schreiber TrustCredit Suisse AG, Singapore BranchDBS BankHiap Hoe Funding Pte LtdSPH: 6.7% of REIT

This can give Prime US REIT a market capitalization of US$812 mil.

The sponsored needed to listing Prime US REIT someday in the past since final yr however the volatility final yr and all of the unfavourable USA tax state of affairs have made itemizing very difficult.

From what we perceive there have been some adjustments to the configuration of the REIT itemizing:

Primarily SPH changing into a brand new cornerstone investorSPH (Occasions Properties Restricted) additionally took a 20% stake within the managerKBS REIT III ramp up their stake from 16% to now 24.7percentThe supply measurement (cornerstone + placement + public providing) bought decreased from US$705 mil to US$612 milGearing going up from 35% to 37%

The problem for a REIT that needs to take pleasure in Portfolio Curiosity Exemption (PIR) and never pay the 30% withholding tax on dividend is that every non USA resident shareholder can not personal greater than 10% of the USA REIT.

And that is likely to be a motive why every shareholding is relatively small. The sponsor gained’t be a considerable shareholder.

It’s attention-grabbing that Prime US REIT’s largest shareholder is the fund that it purchased its asset from. I’m not certain how I ought to conclude right here. I believe the sponsored initially do want to understand extra of the asset gross sales from KBS REIT III to this entity and never maintain a lot models.

Nonetheless, in gentle of the issue in drumming up pursuits, or their anxiousness of how poorly Prime US REIT will do after seeing the lukewarm response of ARA Hospitality REIT and Eagle Hospital Belief, they resolve to pivot.

At this level, we should always actually speak about who owns the supervisor:

KBS Asia Companions (KAP): 40%P Bren KAP I, LLC, which is owned by Linda Bren 2017 Belief – 33.3percentSchreiber KAP I, LLC, which is owned by Charles J Schreiber Jr – 33.3percentRana KAP I, LLC, which is owned by Rahul Rana – 16.66%R Bren KAP I, LLC, which is owned by Richard Bran – 16.33%SPH – Occasions Properties Restricted: 20%Keppel Capital Two Pte Ltd – 30%Experion Holdings – 10%AT Holdings, Sai Charan, personal by founder Arvind Tiku

You’ll understand that, the bulk cornerstone buyers, main shareholders and the managers, are nearly the identical folks. DBS has been actively attempting to carry these oversea gamers to return and listing on our bourse.

It’s as in the event that they listed a car that’s primarily owned by themselves, or their companions in order that minority shareholders can experience along with them. I believe extra possible they have been unable to search out the cornerstone buyers which are and thus KBS REIT III must take up extra. Whether it is for their very own khakis, they may very properly let this entity be unlisted and handle themselves.

The Portfolio

Prime US REIT encompass 11 Class A Workplace Properties. Singapore buyers shouldn’t be so unfamiliar with the workplace property scene within the USA as Keppel KBS was listed a couple of brief years in the past.

Its closest peer might be one other Class A Workplace REIT Manulife US REIT. I’ve written sufficient content material on Manulife US REIT, the traits, the withholding tax conditions, the character of the leasing in that nation.

I believe in case you are investing in Prime US REIT, it’s best to at the very least learn by way of what I’ve to say about it (particularly in case you are nonetheless not so certain in regards to the tax defend stuff):

Particulars of Prime US REIT’s Properties

One factor I understand is that majority of the portfolio are sub-urban Grade A properties. That may clarify the enticing CAP fee for the portfolio.

This isn’t a slight on Prime US REIT. About 50% of Manulife US REIT’s places of work are positioned in sub-urban areas. They consider that there’s a development in the direction of transferring out nearer to the place the staff stay, in order that there are extra work life steadiness.

Class A workplace will be discovered within the CBD or sub-urban. Cushman defines Class A as probably the most prestigious, top quality normal, well-located buildings, usually metal and concrete building, constructed or renovated after 1980 and competing for premier workplace customers with above market rents.

Four properties are in Tier I cities – 28.7% of Internet Property Income4 properties are in Tier II cities – 35.9% of NPI3 properties are in Tier III cities – 35.three% of NPI

The properties are in good state of maintenance as the present administration has systematically made obligatory enhancements to the constructing techniques and added or refurbished frequent areas as wanted over time to boost their attraction. (for extra data on Class A, Class B and Trophy, consult with my previous Manulife US REIT articles)

Based mostly on the itemizing value of US$zero.88, the dividend yield in FY2020 is 7.6% and FY2019 is 7.4percentAll 11 properties are Freehold standingThe Weighted Common Lease Expiry (WALE) is 5.5 years.The common occupancy is 96.7%10 out of 11 both are LEED Licensed, Power Star Licensed, or LEED Gold, LEED Platinum, signifying their vitality efficiencyAverage 2.1% annual rental escalationManagement charge: 10% of Annual Distributable Earnings and 25% Efficiency charge primarily based on the development in Dividend per Unit

The WALE is comparatively lengthy, the yield is enticing and the gearing is cheap. I believe some buyers would really like this portfolio if the managers is ready to develop this portfolio.

Prime US REIT versus Manulife US REIT

Traders right here have about 1 yr plus to be acquainted with the supervisor’s capabilities in acquisition and talent to resume current leases, leased out new leases.

Relying on how snug you’re with KBS, your different query is how Prime US will measure up towards one other pure Class A portfolio.

The desk beneath reveals how Prime US and Manulife US in contrast towards each other:

Prime US REIT seems to be extra enticing when it comes to dividend yield. What shouldn’t be mirrored on this comparability is that each REIT is paying 100% of their supervisor’s charges in models, so that could be a relatively honest comparability.

The property portfolio worth for Manulife US REIT is decrease than the newest figures as a result of I need to gauge the property administration charges and supervisor’s base charge as a proportion of the property worth. Each REIT is paying roughly the identical proportion when it comes to property administration charges. Manulife US REIT, surprisingly have a decrease base charge as a proportion of AUM in comparison with Prime.

One comparability that I missed out, and I would come with it in writing is that each Class A workplace REIT common 2.1% in annual rental escalation (should you mixed natural rental escalation and mid time period overview)

The remaining is sort of the identical besides that the weighted common debt to maturity for Prime US REIT is vastly larger.

Given the scale of Prime US REIT’s portfolio, and the possession construction, I believe there is likely to be a rights concern coming our method sooner or later.

The attainable lack of liquidity may work towards the REIT in elevating non-renounceable rights concern or placements, that are usually to institutional buyers, household places of work.

Manulife US REIT are beginning to attain the scale the place they’ll perform acquisitions, finance by fairness elevating which are at slight reductions. Prime US REIT can place out as properly, in the event that they place it to some very wealthy particular person or entity, and the present shareholders are keen to subscribe to much more of Prime US REIT’s models.

The potential of future rights concern may put a ceiling to the share value of Prime US REIT.

Reviewing the Previous Income and Revenue Efficiency

Prime REIT offered some information relating to the properties’ previous income and web property earnings figures.

I believed the information will at the very least enlighten us how properly the properties have been performing.

Income 2016 to 2018 Evaluation

Within the first desk, I examine the yr on yr efficiency of the income. There are some properties which have attention-grabbing outcomes:

Village Middle Station I: regardless of a drop in occupancy not too long ago, income development was robust, which can point out robust leasingPromenade I & II: regardless of a drop in occupancy in 2017, income was up171 17th Avenue: This property reveals some enchancment in occupancy however the income revision is excellent

I needed to see if there are some actual working leverage for the properties.

In idea, the price of operation shouldn’t enhance proportionately as hire enhance by way of natural escalation (in Prime US REIT’s case, it’s a median of two.1% a yr enhance).

Majority of the leases, I think are on modified gross hire. We hold seeing within the prospectus recoveries earnings, which is probably going the bills that the REIT was in a position to get well from tenants. So these leases ought to be one thing relatively shut to love double web leases at the very least.

Analyzing Rev with NPI and NPI Yield

We will analyse this by wanting on the distinction in development yr on yr between the income and web property earnings.

It isn’t all the time a one to at least one relationship. For Village Middle Station I, in 2017 to 2018, the income went up however the NPI went down. Similar for Reston Sq..

Nonetheless, in numerous circumstances, we see majority of the income enhance straight handed to the underside line (web property earnings):

A 400ok rise in income in 2018 at Village Middle I resulted in an nearly 400ok rise in NPIA 1 mil rise in income in 2018 at South Hanley resulted in a 800ok rise in NPIA 1 mil rise in income in 2017 at Tower 909 resulted in a 700ok rise in NPIA 1.7 mil rise in income in 2017 at 171 17th Avenue resulted in a 1.Four mil rise in NPI

The conclusion is that when it comes to earnings, it’s not a 100% move by way of from income to NPI, however baring any distinctive prices, a big portion ought to be handed to the earnings.

To the acute proper of the desk above, you possibly can see the web property earnings yield development over the three years. They’re measured towards the newest valuation of every particular person property that Prime US REIT’s shareholders shall be buying it at.

Taken from Manulife US REIT’s slides on areas the place good acquisitions can come from

You’ll be able to examine it towards the CAP fee revealed by CBRE CAP Price Survey for the second half of 2018.

I’ve tabulated for straightforward comparability:

Prime US REIT property NPI yield versus 2018 Second Half Survey

These rows market in purple are the buildings the place the Valuer’s CAP Price, primarily based on their Dec 2018 Internet Working Earnings, is lower than what CBRE surveyed in 2H 2018.

Do notice that the surveyed CAP Price is predicated on properties whose earnings is stabilized and with a sure degree of occupancy.

Emeryville occupancy was relatively low which explains the low yield versus market, Village Middle Station II simply accomplished not too way back so the information is incomplete.

For those who take out Village Middle Station II, 36% of the portfolio gave the impression to be purchased beneath market hire. You’ll be able to have a look at it two methods:

The shareholders bought property which are beneath market performanceThere are alternatives that the outcomes will be improved upon

KBS REIT III’s Earnings

The properties that have been offered into Prime US REIT have been from an unlisted REIT KBS REIT III. KBS REIT III would nonetheless personal 24.7% of Prime US REIT.

If we have a look at a number of the presentation of KBS REIT III we will get some data akin to the acquisition value of those properties, how a lot work was put into them, and when was the acquisition.

The desk beneath presents a few of these data.


I’m relatively puzzled why I can not discover the information on the newest valuation of those properties. It’s as if the unlisted REIT didn’t revalue the properties.

My hunch is that to reduce taxes, the properties are handled as plant, property and tools and are accounted at value minus depreciation. Thus, I can not discover that data there.

I did tabulate the CAGR for a few of these properties since their buy. The Atlanta, Dallas, St Louis property have some fairly good CAGR.

Nonetheless, I don’t assume it’s honest to say these properties should not low cost. A fairer comparability can be the appraised worth of those properties in 2018 versus the worth shareholders purchase it at. I couldn’t discover this data.

The Development Potential of Prime US REIT

Prime US REIT do seem like it has an natural development angle.

There may be this tough workplace market cycle clock, which is to assist the buyers visualize the place within the property cycle, the assorted markets are in.

In some way, majority of the properties, are in cities which are in accelerating development. Graphics like these are all the time subjective and ought to be taken with a pinch of salt.

From the residential property podcast that I’ve been listening to, issues are getting extraordinarily cautious over there.

The chance for Prime US REIT is sweet if the expansion is de facto there. Prime US REIT’s lease expiry is properly staggered like a bond ladder.

On this method, the chance that the leases are expiring in a yr the place the market is in a downturn is diversified away. On the flip aspect, because the expiry is properly staggered, it permits the supervisor the chance to lease out or renew leases at larger rents.

That is one thing bonds do not need, which is the flexibility in your dividends to develop.

Within the illustration above, Prime US REIT common market hire is beneath that of the market hire.

My pal, Caveman, will say that maybe some properties are so tough to hire out at market fee, thus they’re perpetually someplace beneath market fee.

Nonetheless, at the very least there are some potential of natural development from a low base (low occupancy, low passing hire, expiring hire), in comparison with their competitor who’ve much less of it.

Lengthy Common Debt Expiry

What I observed in regards to the debt construction is that their debt are concentrated firstly, however not too completely different from when Manulife US REIT begin off at IPO. Extra time, these REITs ought to be attempting to “ladder” out their loans to reduce refinancing dangers.

The second factor is, man, the common debt maturity is 5.6 years. That’s very lengthy! Which is an efficient factor because it minimizes uncertainty there.

I believe shareholders will recognize this, particularly when their debt curiosity is cheap at three.45% and 85% fastened by hedging.

Tax Construction and Threat

The next illustration reveals how the REIT is ready up.

If we examine to Keppel KBS and Manulife US REIT, the principle distinction is the dearth of a Barbados middleman firm, which each of them have.

The Barbados construction is to deal with a number of the potential tax problems led to by the main tax change within the US in 2017 referred to as the Tax Cuts and Jobs Act (TCJA). By having the Barbados entity, the 2 REITs tried to deal with the issue that they are going to be labeled as a “Hybrid Entity” (the Part 267A). If they’re, then they can’t use the shareholder loans, mortgage from the guardian in Singapore to the kid firm in USA as a tax defend, to reduce the taxes.

With out the tax defend, this implies the shareholders doubtlessly goes to get a 10-15% lower of their dividend. That’s large.

Nonetheless, since finish Dec 2018, the clarification to the TCJA don’t present that Manulife US REIT and Keppel KBS’s construction shall be labeled as a Hybrid Entity.

The ultimate all clear is suppose to be introduced some days in the past, however plainly it has been delayed.

However, with the best way Prime US REIT is structured, which is analogous to how KBS and Manulife US REIT initially structured throughout their IPO, it roughly signifies that administration strongly consider that there are not any points there.

This tax stuff is relatively cheem, however in case you are placing your cash in, maybe you have an interest to examine it. You’ll be able to learn my two articles:

In case you are a shareholder, it is advisable submit your W8-BEN kind.

That is to firstly establish you as a non-resident USA citizen, so to qualify for Portfolio Curiosity Exemption (PIR), that your dividends is not going to topic to a 30% dividend withholding tax.

Secondly, it is usually for the REIT to trace the extent of shareholdings of every shareholder to be lower than 9.eight%, in order that they won’t be in violation of the PIR.

One factor that’s attention-grabbing is that, to not violate the PIR, every shareholder holding can’t be greater than 9.eight%.

Then how come KBS REIT III can personal 24.7% of Prime US REIT?

That is answered within the Prospectus, and it was defined proper in the beginning of the prospectus:

Fxxking wall of textual content.

No surprise nobody reads the prospectus.

I believe the overall concept is that whereas KBS REIT III owns 24.7% of Prime US REIT, the supervisor have obtained an Automated Waiver such that it’ll not disqualify Prime US REIT’s USA Subsidiary from qualifying as a US REIT for federal earnings tax objective so long as it’s suggested by an impartial tax adviser and let the shareholders know of the chance that this Automated Waiver could also be forfeited sooner or later.

This Automated Waiver provision protects KBS REIT III from dropping its US REIT standing. A US REIT can’t be held by greater than 50% by lower than 5 or fewer people

Prime REIT have put in place the method of figuring out substantial shareholders. The second substantial shareholder crosses the brink, the shareholder’s models shall be transferred out in order that the shareholder is not going to violate the PIR.

If you concentrate on it, the unlisted KBS REIT III, in all probability are made up of shareholders that, every have smaller shares that might make up lower than 9.eight% of Prime US REIT in the event that they straight personal it. So this waiver in all probability make sense.

The danger is that if this construction (as suggested by an impartial tax guide) shouldn’t be acknowledged or unlawful, then the supervisor is likely to be on the lookout for at the very least three substantial shareholders!


I believe with the current run up in REIT costs, with the yield compressing, and the current IPO of USA hospitality REITS ARA Hospitality and Eagle Hospitality Belief, many are pondering this can be a bubble.

Sentiments sensible, a sponsor is not going to carry a REIT to the market if they can’t get a superb exhibiting out of it. So IPO are often launched when the instances are higher. It is not going to be low cost.

Nonetheless, there are REITs the place it is sensible to purchase at IPO due to the potential for development. Not simply that, they’re acknowledged by the bigger funds, buyers as a REIT that’s below good administration, good development potential, much less danger (when it comes to surprises), good high quality property. They are going to do properly.

I simply assume that proper now there are 2 REIT market, the blue chip bigger capitalized ones and the smaller ones. The primary market has been operating, the second, not as a lot.

My sensing is that as a result of its preliminary IPO measurement, it is likely to be languishing for some time. Acquisitions will are available. And certain utilizing debt and rights concern to develop it to US$ 1.2 bil. With out it being large enough, there ought to be restricted value appreciation.

The current lukewarm REIT IPO response actually labored towards them.

However the portfolio shouldn’t be too unhealthy. The portfolio is especially sub-urban primarily based Class A workplace, which explains the upper dividend yield, and so it seems to be enticing to buyers. From what I see, they’re all positioned with leisure and retail facilities.

I’m nonetheless enthusiastic about getting IPO property with some beneath the market CAP Charges and what I ought to take into consideration that.

There are potential for yield enchancment for Prime US REIT sooner or later and that’s the place we will entry the competency of the supervisor and their potential to organically enhance the portfolio.

I additionally just like the longer common debt expiry as this reduces some uncertainty.

I write extra about REITs in Studying about REITs beneath:

Listed below are My Topical Assets on:

Constructing Your Wealth Basis – You already know this baseline, your long run wealth ought to be fairly properly managedActive Investing – For the lively inventory buyers. My deeper ideas from my inventory investing experienceLearning about REITs – My Free “Course” on REIT Investing for Novices and Seasoned InvestorsDividend Inventory Tracker – Observe all of the frequent Four-10% yielding dividend shares in SGFree Inventory Portfolio Monitoring Google Sheets that many loveRetirement Planning, Monetary Independence and Spending down cash – My deep dive into how a lot it is advisable obtain these, and the alternative ways you will be financially free

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