Adding The Right Mix; Stay BUY

 BUY, TP rises by 3% to USD1.03, 17% upside. Prime US REIT’s addition
of two office buildings strikes the right balance in growing its exposure to upcoming high-growth sectors and new markets, as well as providing income stability, in our view. The yield-accretive acquisition, along with associated fund-raising, should improve trading liquidity and help it inch closer towards major index inclusions – which should narrow the trading discount. It is trading at an attractive 1x P/BV, offering a c.8% FY21F yield.

 New assets a good fit for its portfolio. PRIME has acquired two Grade A office buildings, Sorrento Towers (USD146m) and One Town Centre (USD99.5m). The combined purchase price of USD245.5m is at a slight 1% discount to the assets’ valuations, and implies cap rates of 5.3% and 5.8%. We like the deal for multiple benefits it offers, in terms of diversifying exposure to imminent high-growth sectors such as health sciences, technology, and wealth management. In addition both assets have been recently renovated, with average in-place rental rates at a 7-10% discount to asking rates, along with built-in rental rate escalations of c.3% pa. The assets’ long WALE of >6 years and limited near-term lease expiry (none in 2021) provide added comfort in navigating short-term uncertainties.

 Sorrento Towers, a Class-A office building, is in San Diego’s technology
and life science hub, Sorrento Mesa. The property has a high occupancy rate of 95.6%, with anchor tenant Dexcom (a healthcare service provider) occupying half of the total NLA. Other tenants include players in the semiconductor and real estate spaces. Note that Dexcom expanded its office space in the building in the middle of the COVID-19 pandemic last year, and also has the right to increase its leased space further up ahead. Sorrento Towers’ purchase price of USD493.00 psf is well below the estimated replacement cost of USD700.00 psf.

 One Town Centre is a Class-A office building in the Boca Raton, Florida submarket – one of the wealthiest growing enclaves in the US. The asset’s occupancy rate stands at 94.7%, and its purchase price is USD520.00 psf (vs its estimated replacement cost of USD650.00 psf). Bank of America Merrill Lynch is the anchor tenant, taking up c.34% of total NLA, followed by Raymond James. Both companies offer wealth management services at this location. Other tenants are in real estate and financial services.

 Post-acquisition, gearing remains modest at 39% with PRIME announcing an equity placement to raise USD80m (upsize to USD100m with). The remainder of the acquisition will be funded by debt. The deal will result in a pro-forma DPU (FY20) accretion of 2.4%, and dilute NAV by (1%). We raise FY21-23F DPU by 1-3%, taking into account the acquisitions and associated equity-raising.