t us office reits · us office reits – manulife us reit & prime us reit initiation market...

Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 006/10/2019 Ref. No.: SG2020_0081

US OFFICE REITS

Resilience amid new normal SINGAPORE | REAL ESTATE | INITIATION

Attractive dividend yield of 8% in US office REITs, 94-97% occupancy, built-in rental escalation, freehold assets and WALEs of 4.9-5.7 years.

Tenant demand supported by key industries (tech, financial and professional services) that account for more than 30% of rental income.

Initiate coverage on Manulife US REIT and Prime US REIT with a BUY and a target price of US$0.80 and US$0.88 respectively.

Sector Background The US economy faced a rough start to 2020, as the year opened with a global pandemic. US GDP shrank 4.8% in the first quarter - the biggest contraction since the financial crisis, and the economy is expected to contract between 3.6% and 7.4% in 2020. In the near-term, the pandemic has resulted fewer workers in the office and more satellite offices being built up in the suburbs. We believe working from home is not a permanent solution that can replace physical office materially. Firstly, office remains the most productive environment to work. The potential to guide, innovate and collaborate effectively peaks in a physical office. Secondly, we expect the multi-year trend towards densification of office space to pause, providing near-term support for leasing demand.

Sector Merits 1. Attractive dividend yields. In this economic climate where interest rates globally are

depressed, US office REITs present attractive yield spreads of 7-9% to the US 10-year treasury yields. The yields of SG-listed US office REITs also outperform that of both SG office REITS and US-listed US office REITs by 1.7x.

2. Collaborative work in a dynamic environment to hold demand for office; long WALEs to support. Albeit COVID-19 has accelerated trends like remote working and telecommuting, the US has employed a substantial percentage of remote-working even pre-COVID. Employers do see merits in a dynamic working environment. Coupled with long WALEs, the income stream for office REITs is usually predictable for 5-10 years into the future.

3. Office-using jobs less affected by unemployment; Looking forward to a stabilised normal. Amidst the outbreak, the U.S. unemployment rate surged to its peak of 14.7% in April before declining to 11.2% in June. However, the unemployment rates in June for the anchor industries in the office – Financial Activities and Professional & Business services was 5.1% and 8.6% respectively, which is the lowest few amongst the industries. Using 2008 GFC as a recent crisis proxy, business formations in the U.S. grew steadily over 10 years at a CAGR of 4% as the US economy recovered.

4. Office space demand by Top 3 leasing drivers (Tech, financial and professional services) will moderate not abate. These long-standing pillars of the economy have a long heritage of refining how they do business. The existence of virtual conferencing tools predates COVID, but the fact that these sectors still choose to conduct certain functions/elements of business in the flesh implies that these sectors are best served by office premise and explains the pre-disposition for the office environment. We believe that the structural shifts in the office landscape will be gradual rather than immediate, with the desire for physical collaboration and networking resulting in the maintenance of an office address.

Key Risks 1. Weaker economic outlook and takeaways from COVID-19 to push companies towards a

more mobile operating model. The successful implementation of telecommuting has heightened the possibility of moving towards a premise-light business model. Additionally, consolidation/downsizing within industries may lead to greater ‘shadow market’ space should current tenants be allowed to sublet their space. Held together, this points to a softer leasing environment.

20 July 2020

MANULIFE US REIT

BUY (Initiation)LAST CLOSE PRICE

FORECAST DIV

TARGET PRICE

TOTAL RETURN

Natalie Ong (+65 6212 1849)

Research Analyst

[email protected]

PRIME US REIT

BUY (Initiation)LAST CLOSE PRICE

FORECAST DIV

TARGET PRICE

TOTAL RETURN

Tan Jie Hui (+65 6212 1850)

Research Analyst

[email protected]

USD 0.765

USD 0.068

USD 0.880

24.0%

USD 0.705

USD 0.063

USD 0.800

22.4%

http://www.stocksbnb.com/

Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE)

US OFFICE REITS – MANULIFE US REIT & PRIME US REIT INITIATION

Market Outlook Attractive dividend yields. In this economic climate where interest rates globally are depressed, SG-Listed US office REITs present attractive yield spreads of 7-8% to the US 10-year treasury yields. The yields of SG-listed US office REITs also outperform that of both SG office REITS and US-listed US office REITs by 1.7x. In terms of its risk-reward, we believe that US office REITs are worth the investment in the long run.

Figure 1: SG-listed US office REITs are trading at a higher yield as compared to pureplay SG office REITs and US office REITS, while trading at a discount to NAV

Source: Bloomberg, PSR

Figure 2: US 10-year bond yields hitting record lows

Source: PSR, Bloomberg

Collaborative work in a dynamic environment to hold demand for office; long WALEs to support. Albeit COVID-19 has accelerated trends like remote working and telecommuting, the US is one of the markets that has employed a substantial percentage of remote-working even before the outbreak. According to Gensler’s US Workplace Survey, since 2016, office work has evolved from an individualistic mode (2016: 50%; 2019: 45%) to one that is more learning and collaborative (2016: 50%; 2019: 55%). Employees have spent 14-15% of their work time telecommuting. In the same timeframe, the office market was experiencing positive rent growth and declining vacancies. This shows that telecommuting and office may not be mutually exclusive. (Fig. 3) Figure 3: Positive rent growth and declining vacancies from 2016 to 2019

Source: CBRE Additionally, employers do see merits in a dynamic working environment such as cross-functional collaboration, which lead to mixed responses in their view of needing an office in 3 years. According to PWC US Remote Work Survey (Fig. 4), 30% of employers anticipate they’ll need less total office space, primarily due to remote work. However, 19% foresee no change and 50% are anticipating an increase in office space needs due to physical distancing requirements.

Figure 4: Expectation of office space needs

Source: PWC

Comparison Market Cap (mn) Last Price ($) P/NAV (x) Indicated Yield (%)

Manulife US REIT (USD) 1109 0.71 0.88 8.34

Prime US REIT (USD) 806 0.77 0.86 8.24

Keppel Pacific Oak REIT (USD) 634 0.68 0.84 8.92

Average 850 0.86 8.50

Capitaland Commercial Trust (SGD) 6758 1.75 0.95 4.62

Keppel REIT (SGD) 3662 1.08 0.80 5.19

Average 5210 0.88 4.90

US-Listed office REITs

Alexandra Real Estate Equities (USD) 21685 163.03 2.17 2.60

Boston Properties (USD) 14182 91.28 2.42 4.29

Brandywine Realty Trust (USD) 1780 10.44 1.16 7.28

Corporate Office Properties Trust (USD) 2806 25.02 1.73 4.40

Cousins Properties (USD) 4318 29.07 0.95 4.13

Hudson Pacific Properties (USD) 3619 23.61 1.09 4.23

Mack-Cali Realty Corporation (USD) 1325 14.63 0.92 5.47

SL Green Realty (USD) 3776 48.68 0.74 7.27

Average 6687 1.40 4.96

SG-Listed US office REITs

SG-Listed SG office REITs

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Reduce by more than 25% 3%

Reduce between 16-25% 12%

Reduce between 5-15% 15%

Stay about the same 19%

Increase between 5-15% 26%

Increase between 16-25% 16%

Increase by more than 25% 9%

Office space needs are expected to:



Nevertheless, we believe that office is one of the more resilient subsectors (Fig. 5) Generally leased for a duration of 5-10 years, the income stream for office REITs is usually predictable for years into the future. According to Moody’s Investor Service (Fig. 6), 94% of the larger office leases will only start to expire 4 years from now, which suggests that landlords do have time to adjust to the future of work. Concentration risk can be mitigated through an enlarged property base. Additionally, a diversified tenant mix which comprises larger and more established tenants in growing/defensive sectors can provide the REITs with greater income stability. Figure 5: Office and Industrial REITs held up better amidst COVID-19 outbreak

Figure 6: Lease terms for US office size of 10,000 sqft or more

Source: PSR, Bloomberg, Moody’s

Office-using jobs less affected by unemployment; Looking forward to a stabilised normal. Amidst the COVID-19 outbreak, the U.S. unemployment rate surged to its peak of 14.7% in April before declining to 11.2% in June, which is higher than its peak of 10% during the 2008 Global Financial Crisis (GFC). While the economic data paints a gloomy outlook, the unemployment rates for the heavy-weight anchor industries in the office – Financial Activities and Professional & Business services in June was 5.1% and 8.6% respectively, which is the lowest and third lowest amongst the industries (Fig. 8), according to Bureau Labour of Statistics. We also note that a second stimulus check may be in the books given that the new weekly jobless claims exceed 1mn for 16 weeks since the week of 21 March 2020. Using the 2008 GFC as a recent crisis proxy, business formations in the U.S. grew at a CAGR of 4% over 10 years as the US economy recovered.

Figure 7: Unemployment rate hits a post-war high (%)

Source: NBER; Federal Reserve, BLS

Figure 8: Unemployment rate by industries

Source: Bureau Labour of Statistics

Figure 9: Business formation post GFC

Source: U.S. Census Bureau

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FTSE NAREIT Office Index FTSE NAREIT Retail Index

FTSE NAREIT Hospitality Index FTSE NAREIT Industrial Index

6%

37%

43%

15%

0%

10%

20%

30%

40%

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<4 years 4-8 years 8-12 years > 12 years

500,000

550,000

600,000

650,000

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Demand for Office Space by Top 3 Leasing Drivers will moderate not abate 1. Technology: Growing Technology, Advertising, Media and Information (TAMI) industry to

support office-using job growth. In 1H19, the technology industry accounted for 21.6% of overall leasing activity (Fig. 10). Amid COVID-19, trends like e-commerce, gaming, remote working and distance learning has been accelerated. Second to healthcare and consumer staples, technology has become essential service on top of simply being a sector for growth. According to CBRE, key technology markets like Austin, San Jose, San Francisco, Nashville and Salt Lake City saw greater office-using job growth and higher rates of net absorption in 1Q20. The top 3 markets for Q1 2020 job growth were Austin, San Francisco and Nashville as well. While a growing sector, the tech and media sectors seem to be the most receptive to working-from-home. However, the collaborative and enterprising culture has been the narrative for the demand of office space for tech firms.

Figure 10: Technology was the dominant leasing driver in 2019

Source: JLL

Figure 11: Top 20 markets for office-using job growth, 1Q20

Source: CBRE, Oxford Economics

2. Financial Services: Financial services industry remains hardy. The Finance and Insurance

sector is a cornerstone of the economy and is responsible for 8.4% of the US GDP in 2019, a mild 1ppt growth from 2018. Physical interaction and rapport are generally preferred when dealing in large quantum transactions. These long-standing pillars of the economy have a long heritage of refining how they do business. Despite the existence of virtual conferencing pre-COVID, certain functions/elements of business still require the physical touch. This offers and explanation as to why the financial and profession services sectors may have a pre-disposition for the office environment. The largest U.S. bank by assets, JPMorgan Chase & Co has established a task force to help locations establish plans for reopening, whereas Citigroup is weighing the option of opening satellite offices outside New York City through short-term leases. However, we do note that the desire to return to the office is higher for the US finance sector than the profession services sector.

3. Professional services: Long-term leasing headwinds for the Legal industry. Professional

services are also a traditional anchor of the economy and account for 11.4% of the of the US GDP in 2019, a modest 2ppt growth from 2018. According to Cushman and Wakefield, the legal sector traditionally operated with 300-400sqft per employee, while most sectors have adapted to under 150 sqft per employee. This means that law firms generally subscribe up to double of the space taken by a similar-sized non-legal company. We suspect the sensitive nature and critical function of lawyers, along with high quantum deals, necessitates a physical discussions and collaboration in an uncompromised and dedicated space. However, the historical excessive utilisation of space may change and hence, we think that the legal sector presents the greatest right-sizing risk. While structural shifts are expected, a study by McKinsey concludes that the Finance, Professional Services as well as Real Estate and Rental/Leasing remain the more resilient business sectors (Fig. 13).



Key risks Structural change: Weaker economic outlook and takeaways from COVID-19 to push companies towards a more mobile operating model. Containment measures have forced companies to implement remote working and highlighted the need for more robust business continuity plans. Counteracting leasing strategies have emerged. The successful implementation of telecommuting has heightened the possibility of moving towards a premise-light business model. Additionally, consolidation/downsizing within industries may lead to greater ‘shadow market’ space should current tenants be allowed to sublet their space. Held together, this points to a softer leasing environment. On the other hand, companies may look to reduce office-concentration risk by having split offices and lower desk density, increasing the need for flex space. Figure 12: COVID-19 hotspots across the US

Source: New York Times

Figure 13: Finance, Professional Services as well as Real Estate and Rental/Leasing remain the more resilient business sectors

Source: McKinsey

Leasing and supply headwinds. According to CBRE, leasing activity fell by 18% QoQ and 14% YoY as businesses take on a more cautious approach with regards to relocations and expansions. Overall, office vacancy rate increased by 20bps as new supply outpaced demand in 1Q20. Net absorption for the quarter was the lowest since 1Q13. Rental growth is expected to remain weak, as the landlord’s pricing power is highly reliant on demand for office space which is at the mercy of its markets’ employment growth and economic health. Comments: The nature of business, utilisation of space and workforce demographic differs across trade sectors, as such, so will the response and occupier strategies. While the office landscape will experience structural change, we believe that it will be gradual rather than immediate, with the desire for physical collaboration and networking resulting in the maintenance of an office address.

Figure 14: Leasing activity in 1Q20 fell 18% QoQ

Source: CBRE

Figure 15: Net absorption in 1Q20 is the lowest since 1Q13

Source: CBRE



Why Manulife US and Prime US 1. Flight to Quality. Trophy and Class A assets have historically outperformed all office types in

terms of average rents and occupancy, especially in prime areas located in/near the CBDs. Furbished in high quality architecture and amenities fitting for prestigious tenants to set up their headquarters, these high-classed assets are often part of the tenants’ branding strategy to resonate confidence and financial health. MUST and PRIME’s portfolio comprises of assets that minimally Class A and above, with no sector or tenant concentration exceeding 22.1% and 15.1% respectively. In times of uncertainty, we believe it is more worthwhile to stick to diversified REITs with high quality assets.

2. Equipped with strong sponsors recognised for their track record in real estate. MUST’s sponsor, Manulife, has more than 90 years of real estate development experience and manages over 60mn sqft of commercial real estate daily. As a private equity real estate company, PRIME’s sponsor – KBS is one of the largest owners of premier commercial real estate in the nation, with transactional activity exceeding $41bn. Both MUST and PRIME are backed by reputable sponsors with extensive expertise and track record in weathering through disruptive events, which may provide comfort to investors in this economic climate.

3. Many of Manulife’s and Prime’s assets are in the top 25 tech cities in North America (Fig. 16). According to Cushman & Wakefield, the average asking rents in the top 25 tech cities have increased nearly 50% since 2010, almost twice as fast as the whole U.S. In addition, property values in the top 25 tech cities increased roughly 60% in price per square foot during the same period, which is more than double the rate of the national average. We are expecting the valuation and income stream of MUST’s and PRIME’s assets to benefit similarly from the growth of technology companies, especially in key cities like Salt Lake City and Atlanta where there is a significant expansion in VC funding.

4. Riding on ‘Hipsturbia’; Appealing live-work-play suburbs/ second-tiered cities with big city

charms. There is a growing attractiveness in ‘cool’ suburbs / second-tiered cities (e.g. Sacramento, Atlanta) which offer better affordability and similar city-life amenities as that of the major cities (e.g. New York, San Francisco and Chicago). MUST and PRIME have substantial presence in these markets. In addition, these markets are also home to a young population and a highly educated workforce which are key qualities companies gravitate to as they poised themselves for growth. According to Redfin, Atlanta and Sacramento are within the list of top 10 cities Americans are moving into in 4Q19 (Fig. 17).

The rebirth of the new live-work-play neighbourhoods in old school cities, agile office designs and massive capex in older office inventory is expected to flourish these key markets with new and refreshed opportunities. We believe that under-rated cities with amenities and attributes of a major city will be more attractive to US companies and citizens moving forward, exacerbated by more permissive policies around remote work and an overall shift towards greater affordability during times of duress.

Figure 16: Top 25 Tech markets in North America

Source: Cushman & Wakefield

Figure 17: Top 10 Cities by net inflow in 4Q19

Source: Redfin 4Q housing migration report

Cities where technology is a critical market driver

Austin Boston

Provo, UT Raleigh/Durham

San Diego San Francisco

Salt Lake City Seattle

Silicon Valley Washington, DC

Cities where technology is a key market driver

Atlanta Dallas/ Fort Worth

Denver Minneapolis/ St. Paul

Montreal Portland, OR

Toronto Vancouver

Cities where technology is an important market driver

Baltimore Chicago

Charlotte Greater Los Angeles

New York City Philadelphia

South Florida

Top Cities Net inflowMedian home price Top city of origin

1 Phoenix, Arizona 6509 $289,900 Los Angeles, CA

2 Sacramento, California 5675 $335,500 San Francisco, CA

3 Las Vegas, Nevada 5660 $299,900 Los Angeles, CA

4 Atlanta, Georgia 5377 $315,000 New York, NY

5 Austin, Texas 4038 $400,000 San Francisco, CA

6 Dallas, Texas 3420 $375,000 Los Angeles, CA

7 Portland, Oregon 3402 $449,900 San Francisco, CA

8 Tampa, Florida 2904 $310,000 Orlando, FL

9 Boston, Massachusetts 2874 $769,000 New York, NY

10 Nashville, Tenessee 2864 $329,000 New York, NY




Comparison Manulife US REIT Prime US REIT Keppel Pacific Oak US REIT

Portfolio size (bn) 2.1 1.42 1.27

Properties 9 12 13

Asset class Trophy and Class A Class A Class A and Class B

Key locations

By AUM

Atlanta - 20.6%

Jersey City - 16.6%

Irvine - 16.5%

By CRI

Salt Lake City - 13%

Atlanta - 13%

Washington DC - 12%

By AUM

Seattle - 39.5%

Houston - 13.0%

Orlando - 11.3%

Occupancy (%) 96.50% 94.90% 94.00%

WALE by NLA (years) 5.7 4.9 5.3

Average rental escalation (%) 2.00% 2.10% 2.60%

Sponsor Manulife KBS Asia Partners Pte Ltd Keppel Capital and KPA

Sponsor stake 8.60% 24.70%

Keppel Capital - 7.39%

KPA - 6.86%

Sponsor's managed funds Global Real Estate AUM - $18.5 bn

$11.6bn by AUM

$41bn by transactional volume

Keppel Capital - $33bn by AUM

KPA - $3.2bn by AUM

Gearing 37.70% 33.70% 36.90%

Cost of debt 3.37% 2.80% 3.53%

Debt profile

Fixed - 95.1%

Floating - 4.9%

Fixed - 89.1%

Floating - 10.9%

Fixed - 81%

Floating - 19%

Weighted average debt maturity (years) 2.8 4.8 2.9

Tenants 182 238 >440

Key tenants

The William Carter Co. - 6.1%

TCW Group - 4.0%

Kilpatrick Townsend - 3.7%

Charter Communications - 9.0%

Goldman Sachs - 6.2%

Sodexo Operations - 5.8%

Ball Aerospace - 3.5%

Oculus VR - 2.4%

Lear - 2.1%

Sector concentration

Legal - 22.1%

Finance and insurance - 20.1%

Retail trade - 13.5%

Finance - 15.1%

Communications - 12.5%

Accommodation & Food Services

- 9.0%

Technology - 29.0%

Professional services - 27.8%

Finance and insurance - 21.6%

Market Cap (US mn) 1109 806 634

Indicated Yield (%) 8.34 8.24 8.92

P/NAV 0.88 0.86 0.84

Portfolio metrics

Sponsor details

Financial position

Tenant mix

Valuation

Comparing US Office SREITS




Comparison Market Cap (mn) Last Price ($) P/NAV (x) Indicated Yield (%)

Manulife US REIT (USD) 1109 0.71 0.88 8.34

Prime US REIT (USD) 806 0.77 0.86 8.24

Keppel Pacific Oak REIT (USD) 634 0.68 0.84 8.92

Average 850 0.86 8.50

Capitaland Commercial Trust (SGD) 6758 1.75 0.95 4.62

Keppel REIT (SGD) 3662 1.08 0.80 5.19

Average 5210 0.88 4.90

US-Listed office REITs

Alexandra Real Estate Equities (USD) 21685 163.03 2.17 2.60

Boston Properties (USD) 14182 91.28 2.42 4.29

Brandywine Realty Trust (USD) 1780 10.44 1.16 7.28

Corporate Office Properties Trust (USD) 2806 25.02 1.73 4.40

Cousins Properties (USD) 4318 29.07 0.95 4.13

Hudson Pacific Properties (USD) 3619 23.61 1.09 4.23

Mack-Cali Realty Corporation (USD) 1325 14.63 0.92 5.47

SL Green Realty (USD) 3776 48.68 0.74 7.27

Average 6687 1.40 4.96

IREIT (SGD) 471 0.74 0.83 7.37

Elite Commercial REIT (GBP) 228 0.69 1.18 7.10

Average 349 1.01 7.24

Frasers Logistics Trust (SGD) 4090 1.20 1.18 5.77

Suntec REIT (SGD) 4027 1.43 0.67 5.89

OUE Commercial Trust (SGD) 2108 0.39 0.64 5.64

Mapletree Commercial Trust (SGD) 6360 1.92 1.10 1.90

Lendlease Commercial REIT (SGD) 750 0.64 0.78 4.03

Cromwell European REIT (EUR) 1150 0.45 0.87 9.02

Average 3081 0.87 5.38

SG-Listed diversified REITs with office exposure

SG-Listed US office REITs

SG-Listed SG office REITs

SG-Listed foreign office REITs

Peer Comparison



Manulife US REIT Quality that speak for itself

SINGAPORE | REAL ESTATE (REIT) | INITIATION

Favourable portfolio attributes – occupancy of 96.5%, long WALE of 5.7 years, built-in rental escalation (c.2% p.a.), low expiries (4.4%/6.4% FY20/FY21), and high tenant retention of 76% in FY19.

Relevance and preference for a physical workplace to continue; demand for office to moderate not abate.

Initiate coverage with a BUY and TP of US$0.80; attractive FY20e/FY21e yield of 8.8%/9.0% and 0.88x P/NAV trading close to historical low (0.8x).

Company Background

Manulife US Real Estate Investment Trust (MUST) is a Singapore real estate investment trust (REIT) listed on the SGX since 20 May 2016. It has expanded the portfolio by acquiring 6 properties since listing. As at 31 March 2020, Manulife US REIT's portfolio comprises nine prime freehold office properties strategically located in Los Angeles, Irvine, Atlanta, Secaucus, Jersey City, Washington, D.C. and Virginia with a combined asset value of US$2.1 billion as at 31 December 2019.

Investment Merits

1. Favourable portfolio attributes - Income visibility and growth embedded in the portfolio. Occupancy of 96.5%, long WALE of 5.7 years, 95.6% of leases have built-in rental escalation (c.2% p.a.), low expiries (4.4%/6.4% FY20/FY21) and high tenant retention of 76% in FY19. MUST’s high occupancy is attributed to its portfolio of Grade A and Trophy assets which are well-amenitised, located in cities with skilled work force and work-live-play characteristics. These assets usually attract HQ and mid-to-large tenants who tend to have stronger balance sheets.

2. Attractive valuations of 0.88x P/NAV near -2 standard deviation (SD) level, 3.28% yield spread at +1 SD level. Valuations are near historical lows and attractive given MUST’s resilient portfolio. Office valuations will be more stable due to the stronger the financials of office landlords, as most office-using tenants experience lower business disruption in this COVID-19 environment, leading to higher collectability of rent and lower amounts of rental waivers and deferments.

3. Continued relevance and demand for office space; demand for office to moderate not abate. Top 3 leasing drivers (tech, financial and professional services) are the cornerstone of the economy and exhibit a predisposition for the office workplace setting. Proponents of the office environment continues to view the office setting as a more ideal workplace for efficiency, productivity, collaboration, and creativity. Additionally, trend study show that the while collaboration amongst employees is on the rise, the physical face-to-face mode of collaboration is as valued as virtual collaboration.

Key Risks

1. Higher than expected adoption of remote working and weaker than expected leasing environment.

2. Changes in tax regulations, affecting tax exemption and deductibility of dividends.

Initiate coverage on Manulife US REIT with a BUY and TP of US$0.80

Our DDM-derived target price is based on a five-year projection, cost of equity of 10.0% and terminal growth rate of 2%. It translates to a FY20e dividend yield of 8.8% and a total return of 19.1%. MUST is currently trading at attractive valuations, P/NAV of 0.88x is at the -2 SD level. US Office demand is expected to remain largely stable due to demand from cornerstone trade sectors (financial, legal, tech). MCI (P) 006/10/2019 Ref. No.: SG2020_0082

20 July 2020

BUY (Initiate)LAST CLOSE PRICE

FORECAST DIV

TARGET PRICE

TOTAL RETURN

COMPANY DATA

BLOOMBERG CODE: MUST SP

O/S SHARES (MN) : 1,573

MARKET CAP (USD mn / SGD mn) : 1109 / 1109

52 - WK HI/LO (SGD) : 1.08 / 0.55

3M Average Dai ly T/O (mn) : 3.62

MAJOR SHAREHOLDERS (%)

PRUDENTIAL PLC 5.9%

MANULIFE FINANCIAL CORP 5.5%

DRACHS INV 3 LTD 4.9%

VANGUARD GROUP INC 3.5%

PRICE PERFORMANCE (%)

1MTH 3MTH 1YR

COMPANY (10.8) (2.8) (16.8)

STI RETURN (1.8) 2.1 (18.6)

PRICE VS. STI


KEY FINANCIALS

Y/E Y/E Mar FY18 FY19 FY20e FY21e

Gross Rev. (SGD mn) 145 178 201 207

NPI (SGD mn) 91 111 126 130

Dis t. Inc. (SGD mn) 71 83 100 104

P/NAV (x) 0.93 1.25 0.89 0.90

DPU (cents ) 5.57 5.96 6.31 6.50

Dis tribution Yield (%)7.23 5.96 8.95 9.22

Source: Company, PSR

VALUATION METHOD

DDM (Cost of Equi ty: 10%; Termina l Growth: 2%)

Natalie Ong (+65 6212 1850)

Research Analyst

nata l ieongpf@phi l l ip.com.sg

22.4%

USD 0.705

USD 0.063

USD 0.800

0.50

0.70

0.90

1.10

Jul-19 Oct-19 Jan-20 Apr-20 Jul-20MUST SP EquityFSSTI Index



Figure 18: 9 properties located in 6 primary markets across the US

Source: PSR

Figure 19: Share price performance and acquisitions

Figure 20: AUM breakdown by asset

Figure 21: AUM breakdown by market



Investment Thesis 1. Favourable portfolio attributes – occupancy of 96.5%, long WALE of 5.7 years, built-in

rental escalation (c.2% p.a.), low expiries (4.4%/6.4% FY20/FY21) and high tenant retention of 76% in FY19. Income visibility owing to portfolio WALE of 5.7 years and built-in rental escalation (c.2% p.a.). Smaller tenants (occupiers of space) typically enter 3 to 5-year leases, mid-sized tenants opt for 5 to 7-year leases and large tenants will commit to longer leases of c.10 years. MUST’s WALE of 5.7 years is long compared to the WALE of office SREIT and is due to the proportion of large tenants in the portfolio. Due to the higher percentage of leases with long terms, lease expires for FY20 and FY21 are 4.4% and 6.4% by GRI respectively (Figure 25), which is favourable given the weaker business sentiment induced by the COVID-19 pandemic, which is expected to put pressure on leasing demand. Longer leases tend to have rental escalations written into them. 95.6% of MUST’s leases have embedded rental escalations which average 2.0% per annum (p.a.), providing rental growth. Quality attracts quality. MUST’s has maintained high portfolio occupancy above 95% since listing (Figure 22) and its portfolio enjoys and above-average occupancy for the majority of its comparable submarket (Figure 24). MUST’s high occupancy is attributed to its portfolio of Grade A and Trophy assets which are well-amenitised, located in cities with skilled work force and work-live-play characteristics. These assets usually attract HQ and mid-to-large tenants who tend to have stronger balance sheets. The top 10 tenants contribute 14.6% to GRI (Figure 27) and have WALE of 6.7 years, majority of which are listed entities and/or use the space as HQ locations. Portfolio anchored by trade sectors that are the pillars of the economy (Legal 22.2%, Finance 20.2%). While lockdowns have resulted in only 10-20% of tenants operating within MUST’s properties, business disruptions have been mitigated by the ability to telecommute. A vast majority of MUST’s rents up to June have been collected, with only 2% of rental deferments provided to retail and F&B tenants in April. Regardless of the economic cycle, the Finance and Legal sectors will remain a resilient cornerstone of the economy and we think that a portfolio anchored by tenants in these trade sectors will prove more stable (Figure 26).



Figure 22: High portfolio occupancy maintained

Figure 23: Historical WALE

Figure 24: Most assets achieve occupancy higher than assets in their submarket

Note: Meadowlands: Vacancy includes old/ incomparable buildings. Plaza’s competitive set has ~2% vacancy rate Fairfax: Supply of quality office product in submarket is limited. Centerpointe’s competitive set has c.10% vacancy

95.9%96.7%

95.8%96.5%

90.0%

92.0%

94.0%

96.0%

98.0%

FY17 FY18 FY19 1Q20

Portfolio Occupancy

Source: Company,

5.7

5.8

5.9

5.7

5.6

5.7

5.8

5.9

6.0

FY17 FY18 FY19 1Q20

YearsWeighted Average Lease Expiry

(WALE)




Figure 25: Low lease expiries in the coming years

Figure 26: Portfolio anchored by pillars of economy – Legal and Finance

Figure 27: Top 10 tenants by Gross Rental Income (GRI)

Source: Company

Figure 28: MUST Tax structure

Source: Company (1) This structure is effective from 24 April 2020. Please refer to the SGX announcement dated 24 April 2020 titled “Restructuring Pursuant to U.S. Tax Regulations.” The Manager estimates the full impact from Barbados tax saving net of additional compliance costs will only be achieved in FY2021 which is approximately 0.7% of FY2019 distributable income (2) No single investor to hold more than 9.8% (including the Sponsor) - ‘Widely Held’ (No more than 50% of shares can be owned by 5 or fewer individuals) rule for REITs in U.S. (3) There are seven Shareholder Loan SPVs which have extended intercompany loans to the Parent U.S. REIT. (4) Principal repayments are not subject to U.S. withholding taxes. Interest payments that are finally distributed to Unitholders are not subject to U.S. withholding taxes assuming Unitholders qualify for portfolio interest exemption and provide appropriate tax certifications, including an appropriate IRS Form W-8. (5) Subject to 30% withholding tax. (6) Each Sub-US REIT holds an individual property. Creation of the Sub-US REIT is more tax efficient in the event of disposal.



2. Attractive valuations – 0.88x P/NAV near -2 standard deviation (SD) level, 3.28% yield spread at +1 SD level. P/NAV of 0.88x at historical lows and attractive for MUST’s portfolio quality (Figure 29). We deem MUST’s portfolio as strong due to the visible income from rental escalations (2.0% pa), low expiries in the coming years and long WALE of 5.7 years. The high collectability of rents (only 2% of rental deferments provided in April) is also indicative of the quality of tenants in MUST’s portfolio. And as such, while we do expect a softer leasing environment, the income visibility from existing leases is high. MUST will provide high yields of 8.8%/9.0% for FY20e/FY21e in the current low-interest rate environment. With interest rates expected to remain low (MAS10YSGS below 1% since May 2020), we think that the 8.8% yield MUST provide are attractive, especially given MUST’s stable stream of rental income. Yield spread of 3.28% is close to the +1 SD level (Figure 30). The resilience of office assets. Credit report by Moody’s Investor Services highlighted that pockets of distress can be seen in lodging properties, where 22% of loans in CMBS deals were delinquent as of June, followed by 17% for retail properties but only 2.2% for office buildings, according to S&P Global Ratings. We think that office valuations will be more stable due to the stronger the financials of office landlords, as most office-using tenants experience lower business disruption in this COVID-19 environment, leading to higher collectability of rent and lower amounts of rental waivers and deferments. Longer leases in the US office market to provide support for leasing demand. According to Moody’s, majority of lease terms are longer than 8 years - 37% of larger office leases will not expire until the next four to eight years, and a more significant 43% have lease terms of 8 to 12 years (Figure 34). The muted supply in the submarkets where MUST operates bodes well for the REIT and will help to support rents. Unemployment data is not so bleak for office tenants. Unemployment data showed marginal improvement, declining from a peak of 14% in March to 11.1% in June 2020. However, the unemployment rates for Financial activities and Professional & Business services was 5.1% and 8.6% respectively, the lowest and third lowest amongst the industries. Nonetheless, unemployment rates for these two sectors were 3.1ppts and 5.0ppts higher as compared to June 2019. Tenants in the Legal (22.2%) and Finance & Insurance (20.2%) are the top 2 contributing trade sectors for MUST.



Figure 29: P/NAV of 0.88x at historical low (near -2 SD level)

Figure 30: Yield Spread at 3.28% is close to the +1 SD level

Figure 31: Growing NPI over the years

Figure 32: Historical Distributable Income

Figure 33: Historical DPU Performance

Figure 34: Majority of US Office lease terms are more than 8 years (for leases >10,000 sq ft)

Figure 35: Physical collaboration as important as collaborating virtually



3. Continued relevance and demand for office space; demand for office to moderate not abate Office space demand by Top 3 leasing drivers (tech, financial and professional services) which have a predisposition for the office workplace setting. Tech, finance and insurance and legal were the first, second and sixth driver of tenant demand in 2019. Legal (22.2%) and Finance (20.2%) are the two largest trade categories for MUST. The finance and legal sectors are long-standing pillars of the economy have a long heritage of refining how they do business. The existence of virtual conferencing tools predates COVID, but the fact that these sectors still choose to conduct certain functions/elements of business in the flesh implies that these sectors are best served by office premise and explains the predisposition for the office environment. We believe that the structural shifts in the office landscape will be gradual rather than immediate, with the desire for physical collaboration and networking resulting in the maintenance of an office address. The desire to return to the office is higher for the US finance sector. The largest U.S. bank by assets, JPMorgan Chase & Co has established a task force to help locations establish plans for reopening, whereas Citigroup is weighing the option of opening satellite offices outside New York City through short-term leases. Physical interaction viewed as the most effective mode for mentoring, collaboration, and innovation. The US is one of the developed markets with the highest telecommuting workforce pre-COVID. US is one of the markets that has employed a substantial c.15% of remote-working pre-COVID. Proponents of the office environment continues to view the office setting as a more ideal workplace for efficiency, productivity, collaboration, and creativity. According to Gensler’s US Workplace Survey from 2013 to 2019 (Figure 35), office work has evolved from an individualistic mode (2013: 50%; 2019: 45%) to one that is more learning and collaborative. While collaborating virtually has doubled to 14% in 2019 since 7% in 2013, physical collaboration has also roughly doubled (201: 17%; 2019: 30%). Barring containment measures imposed by the COVID-19 pandemic, the trend study show that the while collaboration amongst employees is on the rise, the physical face-to-face mode of collaboration is as valued as virtual collaboration. Offices are the traditional choice for high value-add activities which require problem solving and creativity as the dedicated and open structure of modern office spaces encourages cross-functional collaboration and idea-sharing. It is also believed that a well-amentised and dynamic work environment helps to attract and retain employees, which in part explains how MUST’s Grade A and Trophy assets continue to outperform its competitive set in the various submarkets.

Key risks 1. Higher than expected adoption of remote working and weaker than expected leasing

environment. We have projected for a softer leasing environment owning to lower business formation/expansions and structural shifts towards a more office-light model. A weaker-than-expected leasing environment will result in underperformance versus our estimates.

2. Changes in tax regulations, affecting tax exemption and deductibility of dividends. MUST’s tax structure is efficient in that it minimises taxes. However, it is susceptible to adverse policy changes that may result in tax leakages.

Initiate coverage on Manulife US REIT with a BUY rating and a TP of US$0.80. Our DDM-derived target price is based on a five-year projection, cost of equity of 10.0% and terminal growth rate of 2%. It translates to a FY20e dividend yield of 8.8% and a total return of 19.1%. In our models, we estimated a 1-2% annual escalation rate for the leases. In light of a softer leasing environment going forward, we have accounted for a portfolio vacancy to increase by c. 2%.



Figure 36: Portfolio details


As at 31 Dec

2019Figueroa Michelson Peachtree Plaza Exchange Penn Phipps Centerpointe Capitol

Location (City) Los Angeles Irvine Atlanta Secaucus Jersey CityWashington

, D.C.Atlanta

Virginia

(Fairfax)Sacramento

State California California Georgia New Jersey New Jersey Washington Georgia Virginia California

Announced IPO IPO IPO 19 Jun 17 5 Sep 17 13 Apr 18 13 Apr 18 29 Apr 19 19 Sep 19

Completed IPO IPO IPO 20 Jul 17 1 Nov 17 25 Jun 18 25 Jun 18 13 May 19 30 Oct 19

Property Type Class A Trophy Class A Class A Class A Class A Trophy Class A Class A

Completion

Year1991 2007 1991 1985 1988 1964 2010 1987/1989 1992

Last

Refurbishment

Date

2019 NA 2015 2016 NA 2018 NA 2018 2016

Parking Stalls 841 2,744 1,221 1,474 467 287 1,150 1,456 1,094

NLA (sq ft) 702,951 532,933 558,784 461,525 736,383 277,597 475,629 420,013 500,662

Valuation (US$

million)337.6 345 210.7 119.9 348.6 189 220.1 122.8 201.3

Occupancy

Rate (%)93.8 90.1 95 98.9 95.8 100 100 98.7 94.2

WALE by NLA

(years)3.7 6.1 5 6.4 6.7 4.9 8.1 6.1 5.8

Number of

Tenants29 14 25 7 23 11 10 21 42

TWC Group

(26.1%)

Hundai

Motor

Finance

(22.2%)

Kilpatrick

Townsend

(35.3%)

The

Children's

Place

(42.9%)

Amazon

(17.3%)

US Treasury

(38.9%)

The William

Carter Co.

(62.2%)

ASM

Research

(21.3%)

Wells Fargo

(10.4%)

Quinn

Emanuel

Trial

Lawyers

(19.3%)

Gibson

Dunn

(16.7%)

IDI Logistics

(9.3%)

Quest

Diagnostic

(27.5%)

ACE (13.8%)

United

Nations

Foundation

(37.7%)

Northwest

Mutual

(12.8%)

Edelman

Financial

Services

(20.1%)

WeWork

(10.1%)

Allen

Matkins

(9%)

LA Fitness

(15.3%)

Triage

Consulting

Group

(9.3%)

AXA Advisor

(23.6%)

Rabo

Support

Services

(11.7%)

AOL (6.4%)CoStar

(12.5%)

Board of

Supervisors

(15.9%)

Weintraub

Tobin

Chediak

Coleman

&Gordin

(9.3%)

Top 3 Tenants

(GRI %)



Financials

Statement of Total Return and Distribution Statement Balance Sheet

Y/E Dec, SGD mn FY17 FY18 FY19 FY20e FY21e Y/E Dec, SGD mn FY17 FY18 FY19 FY20e FY21e

Gross revenue 92.0 144.6 177.9 201.0 207.4 ASSETS

Property operating expenses (33.7) (53.9) (67.1) (74.8) (77.6) Investment properties 1,312.8 1,738.7 2,095.0 2,102.5 2,110.1

Net property income 58.4 90.7 110.8 126.2 129.9 Others - - 0.5 0.5 0.5

Net Finance (Expense)/Inc. (9.5) (19.0) (25.7) (27.1) (26.3) Total non-current assets 1,312.8 1,738.7 2,095.5 2,103.0 2,110.5

Manager's base fee (4.7) (7.1) (9.7) (9.7) (10.0)

Other items (1.8) (2.2) (2.7) (3.1) (3.2) Trade receivables 5.9 9.1 7.6 12.6 11.0

Net income 42.4 62.3 72.6 86.3 90.4 Cash 49.7 54.1 60.7 54.7 48.9

FV change, derivatives & ppties 31.4 16.9 (13.5) - - Others - - 0.5 0.5 0.5

Total Return Before Tax 73.8 79.2 58.0 86.3 90.4 Total current assets 56.4 64.2 71.0 70.0 62.5

Taxation (15.8) (14.7) (10.5) - -

Total Return After Tax 58.0 64.5 47.6 86.3 90.4 Total Assets 1,369.2 1,802.9 2,166.5 2,172.9 2,173.0

Distribution adjustments (11.2) 6.5 35.8 13.2 13.4

Income available for distribution 46.7 71.0 83.3 99.5 103.8 LIABILITIES

Current borrowings - 109.9 78.9 223.6 186.1

Per unit data Trade payables 18.2 16.8 26.9 31.2 29.2

Y/E Dec FY17 FY18 FY19 FY20e FY21e Others - - 0.5 0.5 0.5

NAV (US$) 0.82 0.83 0.80 0.79 0.79 Total current liabilities 19.2 128.9 110.9 259.9 220.5

DPU (US cents) 5.77 5.57 5.96 6.31 6.50

Non-current borrowings 458.4 557.3 733.1 588.4 625.9

Cash Flow Others - - 0.5 0.5 0.5

Y/E Dec, SGD mn FY17 FY18 FY19 FY20e FY21e Total non-current liabilities 497.3 609.8 797.3 653.0 690.6

CFO

Total Return Before Tax 73.8 79.2 58.0 86.3 90.4 Total Liabilities 516.5 738.7 908.2 912.9 911.1

Adjustments (18.7) 9.3 50.6 38.4 37.7

WC changes (1.9) (8.3) 2.6 (0.3) (0.2) Net assets 852.7 1,064.2 1,258.3 1,260.0 1,262.0

Cash generated from ops 53.2 80.2 111.2 124.4 127.9 Represented by:

Others (1.0) (0.3) (1.2) - - Unitholders' funds 852.1 1,064.1 1,258.2 1,259.9 1,261.9

Cashflow from ops 52.2 79.9 110.1 124.4 127.9 Perp. securities holders 0.6 0.1 0.1 0.1 0.1

CFI

Purchase of Inv. propty., net (425.0) (388.5) (311.0) - - Valuation Ratios

Capex, net (9.3) (10.8) (45.0) (3.7) (3.8) Y/E Dec FY17 FY18 FY19 FY20e FY21e

Others (1.0) (0.3) (1.2) - - P/NAV (x) 1.10 0.93 1.25 0.89 0.90

Cashflow from investments (434.3) (399.1) (355.5) (3.3) (3.3) Distribution Yield 6.4% 7.2% 6.0% 9.0% 9.2%

NPI yield 5.4% 5.9% 5.8% 6.0% 6.2%

CFF Growth & Margins (%)

Share issuance, net 288.5 197.2 236.7 - - Growth

Loans, net of repayments 165.9 208.9 146.1 - - Revenue n.m. 57.1% 23.0% 13.0% 3.2%

Interest paid (8.4) (17.3) (23.9) (25.9) (25.1) Net property income (NPI) n.m. 55.4% 22.2% 13.9% 2.9%

Distributions (42.5) (58.7) (99.4) (99.5) (103.6) Distributable income n.m. 51.9% 17.4% 19.4% 4.3%

Others (1.0) (0.3) (1.2) - - DPU n.m. -3.5% 7.0% 5.9% 3.0%

Cashflow from financing 393.3 323.6 252.1 (127.1) (130.4) Margins

NPI margin 63.4% 62.7% 62.3% 62.8% 62.6%

Net change in cash 11.2 4.4 6.6 (6.0) (5.8) Key Ratios

Effects of exchange rate 0.1 (0.0) 0.0 - - Net Debt or (Net Cash) 409 613 751 757 763

Ending cash 49.7 60.7 60.7 54.7 48.9 Gearing (%) 33.5% 37.0% 37.5% 37.4% 37.4%

Source: Company, Phillip Securities Research (Singapore) Estimates



Total Returns Recommendation Rating

> +20% Buy 1

+5% to +20% Accumulate 2

-5% to +5% Neutra l 3

-5% to -20% Reduce 4

< -20% Sel l 5

Ratings History

PSR Rating System

Remarks

We do not base our recommendations entirely on the above quanti tative

return bands . We cons ider qual i tative factors l ike (but not l imited to) a

s tock's ri sk reward profi le, market sentiment, recent rate of share price

appreciation, presence or absence of s tock price cata lysts , and speculative

undertones surrounding the s tock, before making our fina l recommendation

1 2 3 4 5

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jan-18

Ap

r-18

Jul-1

8

Oct-18

Jan-1

9

Ap

r-19

Jul-19

Oct-1

9

Jan-20

Ap

r-20

Jul-20


Market Price

Target Price



PRIME US REIT

Prime for resilience SINGAPORE | REAL ESTATE | INITIATION

Attractive yields of 8.9% underpinned by resilient portfolio attributes.

Long WALE with minimal lease expiry in FY20, diversified income contribution and built-in rental escalation to support the portfolio’s gross rental and distributable income.

Initiate coverage with a BUY and a target price of US$0.88.

Company background Listed on the SGX on 19 July 2019, Prime US REIT (Prime) invests in office and real estate-related assets in the United States of America. Prime’s portfolio consists of 12 Class A freehold office properties that are valued at approximately US$1.4 billion, strategically located in 10 primary markets in the US. As at 31 March 2020, no single market and sector within its tenant mix contributes more than 13.5% and 15.1% to the overall portfolio (Largest market: Atlanta, Largest sector: Finance). The portfolio maintains high occupancy rates of 94.9% with a long portfolio WALE of 4.9 years.

Investment Merits 1. Attractive dividend yields. In this economic climate where global interest rates have fallen,

Prime presents attractive yield spread of 8% to the US 10-year treasury yields. Prime is currently trading at 0.86x by P/NAV. Our forward dividend yield for Prime in FY20e and FY21e is 8.9% and 9.5% respectively.

2. Resilient portfolio attributes – Long WALE with minimal lease expiry in FY20, diversified income contribution and built-in rental escalation to support GRI. Income visibility and stability is supported by long portfolio WALE of 4.9 years, with only 5.7% of the leases are expiring in FY20. With no market and sector contribution exceeding 13.4% and 15.1% respectively, Prime offers high levels of diversification in terms of its market, asset and tenants mix. Approximately 98% of the leases have in-built rental escalations of 1-3% p.a.

3. Robust balance sheet through proactive capital management; efficient tax structure. Prime continues to maintain its gearing ratio at a healthy level of 33.7%. There will be no refinancing required until 2024. Prime’s headline tax expenses mostly reflect deferred tax expenses, which will only be realized upon sale of the properties. This reduces cash taxes payable, which results in more distributable income for unitholders. Additionally, Prime’s REIT structure has no tax leakage through federal income or withholding taxes, provided that the unitholders comply and furnish the required documents.

4. Reputable sponsor and management team associated with one of the largest U.S. commercial real estate managers. Associated with KBS, one of the largest commercial real estate managers in the U.S., KBS Asia Partners (KAP) is the sponsor of Prime. KAP owns 40% of Prime’s manager, KBS US Prime Property Management. KBS-affiliated entities invest in and manage commercial real estate assets on behalf of clients. To date, KBS has registered $41.7bn worth of transactional volume with over $8bn of AUM since inception.

Risk Factors 1. Debilitated economy to slow leasing activities for Prime in 2020. Slower global growth is

expected in 2020; we expect leasing activities to weaken as businesses are impacted by the recent escalation of events from COVID-19. While at least half of Prime’s expiring leases (5.7% of GRI) are expected to be renewed, greater investor caution and selectivity coupled with lockdown inconveniences will increase the time required to close new leases.

2. Weakness in co-working spaces. Co-working tenants are expected to be hit hard by the outbreak, due to their focus on short-term leases and a reliance on users coming into the office. Demand for co-working spaces is expected to remain soft, which poses uncertainty to Prime’s income stream. Nevertheless, the total proportion of co-working spaces in the portfolio is only 3.7%.

MCI (P) 006/10/2019 Ref. No.: SG2020_0083

20 July 2020

http://www.stocksbnb.com/



Prime’s Portfolio Figure 37: 12 properties located in 10 primary markets across the US

Figure 38: Portfolio details (as of 1Q20)


Location Valuation (mn) WALE (years) Tenants (no) Occupancy (%) Contribution to CRI (%)

1 Tower I at Emeryville Oakland, San Francisco 127 6.4 17 92% 9%

2 222 Main Salt Lake City, Utah 220 4.8 17 94% 13%

3 Village Center Station I Dever, Colorado 89 2.9 16 87% 6%

4 Village Center Station II Dever, Colorado 146 8.3 1 100% 7%

5 101 South Hanley St Louis, Missouri 83 4.9 32 96% 8%

6 Tower 909 Las Colinas, Dallas 83 4.1 44 93% 8%

7 Promenade I & II San Antonio, Texas 76 3.6 14 100% 6%

8 Crosspoint Philadelphia, Pennsylvania 100 4 13 100% 8%

9

One Washingtonian

Center Maryland, Washington DC 106 4.4 16 96% 9%

10 Reston Square Virginia, Washington DC 50 3.9 7 100% 5%

11 171 17th Street Georgia, Atlanta 181 4.6 16 97% 13%

12 Park Tower Sacramento, California 164 5.3 44 90% 9%



Investment Merits We like the REIT for the following reasons. 1. Attractive FY20 dividend yields at 8.9%, 8% higher than that of US treasury yields. In this

economic climate where global interest rates have fallen, Prime presents attractive yield spread of 8% to the US 10-year treasury yields. Prime is currently trading at 0.86x by P/NAV. Our forward dividend yield for Prime in FY20e and FY21e is 8.9% and 9.5% respectively.

Figure 39: Comparables


2. Resilient portfolio attributes – Long WALE with minimal lease expiry in FY20, diversified

income contribution and built-in rental escalation to support GRI. Income visibility and stability is supported by long portfolio WALE of 4.9 years, with only 5.7% of the leases are expiring in FY20. Lease expiries are also well staggered, with a maximum of 17.3% of leases expiring in the next 4 years.

Figure 40: WALE profile


Approximately 98% of the leases have in-built rental escalations of 1-3% p.a, which provides a clear organic growth outlook for the REIT. Majority of leases by net leasable area (NLA) are on a triple-net or modified gross basis, shielding PRIME from increases in real estate taxes and property expenses. To top it off, the leases expiring in FY20 and FY21 are leased at an average of 7% below market, hence there may be potential rental reversions to help drive rental and distributable income. With no market and sector contribution exceeding 13.4% and 15.1% respectively (Fig. 5 and 6), Prime offers high levels of diversification in terms of its market, asset and tenants mix. 33.4% of the tenant mix is exposed to the Science, Technology, Engineering, Math (STEM) and Technology, Advertising, Media and Information (TAMI) sectors, which is the growing segment in the US. Additionally, all of Prime’s properties are Class A buildings. We believe that a high quality and diversified office portfolio offers more resilience in times of uncertainty.

Figure 41: CRI by markets


Figure 42: CRI by trade sector


Comparison Manulife US REIT Prime US REIT Keppel Pacific Oak US REIT

Market Cap (US mn) 1109 806 634

Indicated Yield (%) 8.34 8.24 8.92

P/NAV 0.88 0.86 0.84

5.7%9.1% 8.9%

17.3%15.5%

43.5%

6.0%8.9% 8.0%

15.7% 15.7%

45.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

FY20 FY21 FY22 FY23 FY24 FY25 andbeyondGRI NLA

13.4%

12.8%

13.5%

12.9%9.4%

7.9%

8.6%

7.6%

7.7%6.2%

Salt Lake City AtlantaWashington DC DenverSacramento St LouisOakland PhiladelphiaDallas San Antonio

15.1%

12.5%

9.0%

8.4%8.5%5.9%

6.1%

4.0%

4.6%

6.4%

4.2%

15.3%

FinanceCommunicationsAccomodation & FoodLegalReal EstateProfessional, Scientific, Tech ServicesMining, O&GHealthcareScientific R&DInformation ServicesGovernmentOthers



3. Robust balance sheet through proactive capital management… As of 1Q20, Prime continues

to maintain its gearing ratio at a healthy level of 33.7% and interest coverage ratio of 5.8x. There will be no refinancing required until 2024 as extension options are available to extend both Revolving Credit Facilities and Term Loans maturing in FY22 and FY23. Near term interest rate risks are also mitigated as close to 89% of the debt is locked into fixed interest rates. Separately, Prime restructured its existing interest rate swaps by entering into a new agreement on its borrowings through 2026. It effectively lowers the weighted average interest rate for the portfolio from 3.3% to 2.8%. Hence, subject to new loans from additional capex needs, we are not expecting interest costs to weigh heavily on Prime’s cost front. With a tax-efficient REIT structure. Prime’s headline tax expenses mostly reflect deferred tax expenses, which will only be realized upon sale of the properties in the portfolio. This reduces cash taxes payable, which results in more distributable income for unitholders. Additionally, Prime’s REIT structure has no tax leakage through federal income or withholding taxes, provided that the unitholders comply and furnish the required documents for Portfolio Interest Exemption. [Refer to Appendix II – Prime US REIT’s Structure for more details]

4. Reputable sponsor and management team associated with one of the largest U.S. commercial real estate managers. Associated with KBS, one of the largest commercial real estate managers in the U.S., KBS Asia Partners (KAP) is the sponsor of Prime. KAP owns 40% of Prime’s manager, KBS US Prime Property Management. The remaining stake is held by Keppel Capital (30%), Singapore Press Holdings (20%) and AT Holdings (10%). KBS-affiliated entities invest in and manage commercial real estate assets on behalf of clients. To date, KBS has registered $41.7bn worth of transactional volume with over $8bn of AUM since inception. KBS has presence in all the states that Prime has presence in. Given that KBS has successfully managed properties through 4 disruptive events, its expertise and track record present more value to Prime’s organic growth potential through troubled times. Separately, Prime will also be able to benefit from KBS’ deal sourcing, deal screening and deal execution capabilities for inorganic growth opportunities. We believe that KBS will be able to help Prime navigate through occupancy woes in times of stress and offer a platform for future growth prospects when the market turns around.

Figure 43: KBS Core Strategy Team Managed Properties

Source: Company

Figure 44: Debt expiry profile

63

160 160

105

0

50

100

150

200

Debt (US$mn)



5. Prime’s properties are situated in areas where the office market is attractive and still “landlord favourable”. Many Americans are looking to leave expensive coastal cities, including San Francisco, Los Angeles and New York for more affordable areas that still offer the amenities of a major city. Similarly, attributes like being home to a young population, a highly educated workforce and better affordability are key qualities in a city companies gravitate to as they poised themselves for growth. These attributes are evident in the markets where Prime is in. According to Redfin, Dallas (7.7% of CRI), Atlanta (12.8% of CRI) and Prime’s newest market, Sacramento (9.4% of CRI) are within the list of top 10 cities Americans are moving into in 4Q19. For the whole of 2019, we see Utah (13.4% of CRI) and Texas (6.2% of CRI) sustain a high population growth rate (Fig. 9), while none of Prime’s key markets fall within the bottom 5 states by population growth. We expect under-rated cities with amenities and attributes of a major city to be more attractive to US companies and citizens moving forward, exacerbated by more permissive policies around remote work and an overall shift towards greater affordability during times of duress. According to Cushman and Wakefield, Prime’s portfolio is in the stage of the office market cycle where it is “landlord favorable” (Fig. 10). Sacramento, its newest market is in the accelerating stage of the office market cycle, like that of Dallas’ and Philadelphia’s. Overall, Prime has exposure in 8 markets where rent growth is expected to accelerate, and 2 markets where rent growth will still be slow but positive.

Figure 45: Top and bottom 5 states by population growth in 2019

Source: CEIC, PSR

Figure 46: US Office market cycle

Source: Cushman and Wakefield

Top 5 Growth States Population ('000, 2019) Growth rate (%, 2019) Growth rate (%, 2018)

Idaho 1787 2.07 1.89

Nevada 3080 1.74 1.93

Utah 3206 1.65 1.68

Arizona 7279 1.67 1.61

Texas 28996 1.27 1.17

Bottom 5 Growth States Population ('000, 2019) Growth rate (%, 2019) Growth rate (%, 2018)

West Virginia 1792 -0.68 -0.70

Alaska 732 -0.49 -0.62

Illinois 12672 -0.40 -0.44

New York 19454 -0.39 -0.30

Hawaii 1416 -0.33 -0.27



6. COVID-19 Update: No rent forgiveness; rent collections for May and June are at 99%, with June’s collections on track. Most of the leases do not have pre-termination clauses, so tenants are obliged to compensate till their leases expire in a case of lease break. As of date, only 11 rental deferments are provided to small retail tenants which contribute less than 1% of the GRI. These businesses are amenities to the buildings. Majority of the rent deferrals are expected to be recouped this and next year, while the remaining deferrals included lease extensions equivalent to the number of months’ rent that was deferred.

Figure 47: Top 10 tenants

Source: Company

Apart from Sodexo, Apache and WeWork, majority of Prime’s top 10 tenants are established tenants. All of Prime’s top 25 tenants which constitute 64% by CRI have paid 100% of April’s and May’s rent. Amidst uncertainty in the outlook for co-working spaces, it may comfort investors to know that the rents from all co-working entities (WeWork + 3 smaller operators) have been collected. Additionally, Prime holds a letter of credit and corporate guarantee equivalent to USD$2mn (~8 months of rent) should WeWork default on their obligations. Prime holds approximately 3 months of the portfolio’s gross rental income in the form of security deposits, letter of credit and bank guarantees.

Risk Factors 1. Debilitated economy to slow leasing activities for Prime in 2020. Slower global growth is

expected in 2020; we expect leasing activities to weaken as businesses are impacted by the recent escalation of events from COVID-19. While at least half of Prime’s expiring leases (5.7% of GRI) are expected to be renewed, greater investor caution and selectivity coupled with lockdown inconveniences will increase the time required to close new leases.

2. Weakness in co-working spaces. Co-working tenants are expected to be hit hard by the outbreak, due to their focus on short-term leases and a reliance on users coming into the office. Demand for co-working spaces is expected to remain soft, which poses uncertainty to Prime’s income stream. Nevertheless, the total proportion of co-working spaces in the portfolio is only 3.7%.

Initiate coverage on Prime US REIT with a BUY rating and a TP of $0.88. Our DDM-derived target price is based on a five-year projection, cost of equity of 9.96% and terminal growth rate of 2%. It translates to a FY20e dividend yield of 8.9% and a total return of 24%. In our models, we estimated a 1-3% annual escalation rate for the leases. In light of a lacklustre leasing environment going forward, we accounted for a 5% impact to NPI through an increase in property expenses, as well as a 50% renewal rate for the expiring leases in FY20.

Tenant Industry Sector Credit Rating Property % of CRI

1 Charter Communications Communication Moody's: Ba1 Village Center Station I & II 9%

2 Goldman Sachs Finance

Moody's: A3

S&P: BBB+

Fitch: A 222 Main 6%

3 Sodexo Operations Accommodation & Food S&P: A- One Washingtonian Center 6%

4 Wells Fargo Bank Legal Private Firm 222 Main; Village Center Station I 4%

5 Holland & Hart Finance

Moody's: a1

S&P: A+ 171 17th Street 4%

6 State of California Government

Moody's: Aa2

Fitch: AA Park Tower 3%

7 Arnall Golden Gregory Legal Private Firm 171 17th Street 3%

8 Whitney, Bradley & Brown Professional Services Private Firm Reston Square 3%

9 Apache Corporation Mining, Oil & Gas

S&P: BB+

Fitch: BBB Promenade 2%

10 WeWork Real Estate Fitch: CCC+ Tower I at Emeryville 2%



Appendix I – Market outlook for Prime’s properties

Washington DC Situated near the midpoint of the nation’s Mid-Atlantic coast, the Washington, D.C. CBSA is the seventh most populous metropolitan area in the nation. A highly educated workforce, coupled with a healthy job market, allows its residents to enjoy high per capita incomes and quality of life. This is highlighted by the region’s income and education levels, which are well above the national average. Additionally, the prospect of stable, well-paying jobs routinely attracts young people to the area, resulting in a median age that is slightly lower than the nation’s. Numerous post-secondary institutions and a healthy job market should continue to contribute towards the region’s economic growth over the foreseeable future. Office Outlook: Washington, DC’s sharpest impact from the COVID-19 pandemic in the short-term will center around coworking, which has seen explosive growth in recent years, accounting for 45% of net occupancy growth since 2015, but carries significant exposure in this current climate. While COVID-19 is unprecedented, Washington, DC has experienced less volatility and a faster recovery than peer markets during recent downturns, driven by counter-cyclical economic drivers that remain dominant tenant bases today – government, contracting, nonprofits and associations. During the last two downturns, DC only saw a 3.9% decline in rents versus an 18.5% average decline for major markets, and rents returned to pre-recession levels after seven quarters versus 23 quarters for major markets.

Source: Cushman & Wakefield, JLL

Properties: One Washingtonian Center is a 13-story, Class A, multi-tenant office building located in the Suburban Maryland submarket. The building is the tallest in the immediate area and has good visibility from I-270, which is a leading bio-tech and medical research market. It offers direct on and off access to Interstate 270 as well as the newly constructed InterCounty Connector. Primary tenant is Sodexo. It occupies approximately 61% of the leasable area and it is leased until 2023. The other major tenant is Covance, which will occupy 15 percent of the leasable area until 2026.

Reston Square is a six-story, Class A office building located in Suburban Virginia submarket. It is certified LEED Silver and has a wide range of amenities that have kept the average vacancy rate below 10.0 percent. The subject is fully occupied and leased to a variety of tenants, including Whitney, Bradley & Brown (73,511 sf), SES Government Solutions (22,625 sf), and The Washington Group (8,835 sf). The property is located within ½ mile of a light rail stop.

Source: Company



Salt Lake City Salt Lake City is the largest incorporated city in the metro area and largest city in the state of Utah, with an estimated 198,803 residents, accounting for 16.7% of the metro area population. The metro area’s young and well-educated population is supported by the presence of University of Utah’s large student population. Along with the metro area’s high quality of life and relatively large supply of high wage employment, these attributes make Salt Lake City an attractive locale for new residents and a desirable environment for growing businesses. This is especially true for businesses in sectors that typically demand skilled labor, such as professional services, financial activities, and technology. The metro area should maintain strong economic growth in the near term and will likely continue to exceed national growth trends over the long term. The city’s high quality but relatively low cost of living will continue to attract high skilled employees to the area. Office Outlook: Albeit more slowly than projected, tenant migration into the CBD and the I-15 Corridor is expected to continue in 2020; however, current economic volatility puts construction starts in question. The economy is diverse and resilient, putting it on strong footing. Predominant office-using industries – professional services and technology— are sectors that should remain in demand. Large, well-established companies are more likely to remain stable, and tools are already in place to bolster the regional and state economies. The State of Utah released a multi-phase economic relief plan on March 24th aimed at mitigating health risks and protecting the economy.


222 Main is a Class A, 21-story multi-tenant office building located in the CBD. It is walking distance from the City Creek Center mixed-use development, which offers numerous first class amenities. The property is also close to a light rail (TRAX) stop that allows access to locations throughout Salt Lake Valley and the Salt Lake International Airport. The largest tenants at the subject is Goldman Sachs (177,206 sf), Holland & Hart (89,960 sf) and Perfectly Posh (43,835 sf). The Goldman Sachs lease expires in May 2025, Holland & Hart expires in December 2027 and Perfectly Posh expires in April 2023. The property is served by a light rail stop in-front of the building.

Source: Company



Denver The Denver CBSA has attracted new residents and added jobs at a faster rate than the nation over the last several years. Compared to the nation, the metro area’s slightly younger population also tends to achieve higher levels of educational attainment and subsequently earns higher median incomes. In addition to having a variety of well-established industries such as the aerospace and telecommunication industries, the metro area is an attractive location for expanding businesses due to its well-educated workforce and relatively low business costs. The cost of living is only slightly higher than the national average at 110 percent, and the combination of low taxes, reasonable transportation costs and low utility prices help businesses and households effectively generate more income, improving both the bottom line and quality of life. Job growth in the Denver CBSA will slow as labor force constraints become more acute. The tight labor market will spur faster income growth, however, and support robust consumer spending. Longer term, Denver’s exceptionally strong demographics, skilled

workforce, and broad range of high value-added industries will secure the area’s position as a national front-runner. Office Outlook: Although labour diversity and white-collar labour share in Denver is among the nation’s highest, depressed oil prices and a reliance on tourism that’s being battered by COVID-19 threatens Denver’s economic run of success. The long-term outlook for Denver remains bullish; it’s the balance of 2020 that may prove to be a greater concern.


Both Village Center Station I and II are situated in the Southeast Suburban submarket, and part of the Village Center Station campus, which is a developing three building campus with several major tenants. The property is served by a light rail stop adjacent to the building. Primary access into the local market is provided by Interstate 25, the major north-south highway through Denver CBSA and the State of Colorado. It has easy access to Centennial Airport as well – one of US’s busiest general aviation executive airports. Village Center Station I is a 9-story, Class A, multi-tenanted office building. Some of the major tenants include Charter Communications, Cricket Communications, Regis University, Holland & Hart, LLP, and CB&I Federal Services.

Village Center Station II is a 12-story, Class A, single-tenanted office building. Charter Communications Holding Company, LLC occupies the entire subject property under the terms of a ten-year triple net lease agreement which expires in May 2028. They also have either three-5-year options to renew or two- 6-year options to renew.

Source: Company



Atlanta With a median age of 36.0 years, Atlanta is two years younger than the national median age of 38.0 years. Atlanta is also more educated compared to the national average with approximately 35.0 percent of its adult population having a Bachelor degree or better. Atlanta is highly competitive, with 57 colleges and universities producing a skilled talent pool ready for the workforce. According to the Metro Atlanta Chamber of Commerce, Atlanta leads the nation in attracting highly educated 25 to 34 year olds, which is one of the most coveted demographic cohorts in the country. Forbes magazine continues to rank Atlanta among the best cities for young professionals. In terms of wealth, 26.0 percent of Atlanta households have annual incomes of $100,000 or more, which makes Atlanta slightly more affluent than the national average. High profile corporate relocations and expansions are the main source of growth, allowing for a more resilient and diverse economy. The metro area remains a top contender for noteworthy projects, including Amazon’s second headquarters, Apple’s expansion and Facebook’s data center. The well-educated workforce, diverse industrial structure, strong population growth, tremendous logistics improvements, and tax and other business incentives helps to maintain the region’s premier status. In turn, Atlanta helps the state

solidify its status as the No. 1 state for business, now for the fifth consecutive year. Key growth clusters include core professional services, tech industry, and cybersecurity, logistics technology, transaction processing, data processing and software/mobile apps, as well as healthcare information technology. Local forecasters foresee stronger, faster growth propelled by Hartsfield-Jackson Atlanta International Airport, as it is a major draw for storage facilities and manufacturers, logistics operators and corporate headquarters. Office Outlook: The first quarter delivered positive growth, but there is still uncertainty in the market ahead. Disruption has been limited to date, with retail, hospitality, and transportation industries experiencing initial impacts. Moving forward, the region will likely see spill over effects to professional services firms, like fintech, who serve those industries.


171 17th Street is located within the

master planned mixed use development of Atlantic Station. It is a 22-story, Class A, multi-tenant office building. It benefits from easy access to Interstate 20, 75, 85, 285, 757 and 675; and Georgia Highway 400. It is also in close proximity to Hartsfield Jackson International Airport. Wells Fargo is the primary credit tenant in the building and occupies approximately 30 percent of the space. The property is served by a light rail stop.

Source: Company



Sacramento Sacramento is one of the fastest growing regions in terms of population. Due to the region’s quality of life and affordability, in-migration from San Francisco, Los Angeles and other West Coast metropolitan areas has resulted in an expanding workforce which has driven the overall population growth in Sacramento. Sacramento is home to an abundant and highly educated workforce, due to the presence of several world-renowned institutions nearby. Government employment in Sacramento has outpaced the U.S. average significantly because of the area being the state’s capital and a hub for government services. Currently government employment makes up approximately 22% of the region’s employment sector. Due to the presence of a high-quality workforce and lower cost of living, Sacramento is also increasingly seen as an attractive destination for non-governmental employers. Major healthcare firms such as Sutter Health, Affymetix, Lipomics Technologies, Calgene LLC, Novozymes Biotech Inc. and Volcano Therapeutics; and technology firms such as Apple, Hewlett Packard and Intel Corporation have set up operations in Sacramento. Office Outlook: The impact of COVID-19 on the Sacramento office market will lead to a slowdown in leasing activity. In addition, State general fund impacts are projected to be significant with losses of capital gains and sales tax into the next fiscal year. These factors may cause rent correction. The only speculative development of 90,000 square feet in the pipeline is rumoured to be 100 percent preleased by the State, however, timing is uncertain based on current restrictions on construction activity.

Source: JLL

Park Tower is a Class A office tower in Downtown Sacramento. Park Tower’s focal point is a 3-storey atrium lobby and it has the highest parking ratio of 2.40 in the micro market. Additionally, Park Tower has achieved Gold LEED certified status. The Property has 360-degree views of downtown Sacramento, offers a Walk Score of 96 as well as easy access to nearby public transportation options. The property is well served by the local public transportation network, which includes the Downtown rail system, Sacramento Regional Transit, access to major highways and short commute to Sacramento International Airport.

Source: Company



Oakland The Oakland CBSA is an expensive place to live, with a cost of living that is 39.0% higher than the U.S. average. However, the East Bay remains a more affordable option than most other Bay Area locations. When compared to the U.S., Oakland also differs in demographic aspects relative to income and education levels. Because of the region’s proximity to leading universities, innovation and high-tech industries, it is one of the more educated populations in the nation. The Oakland-East Bay economy, though healthy, has entered into late-cycle expansion. Job growth has slowed over the past two years while wage growth has exceeded the national average for 29 consecutive quarters. The East Bay’s relatively lower business and living costs relative to San Francisco and San Jose/Silicon Valley are desirable for the metro division to attract businesses seeking cost savings, and although affordability is narrowing, spillover growth from its neighbors is stronger than expected. The region’s strengths include the presence of automaker Tesla who, even with its challenges, makes a positive economic impact on the metro, as well as ample infrastructure for transportation and distribution facilities. Office Outlook: Preliminary economic data shows a considerable slowdown in activity due to COVID-19. Lease-expiration driven activity has progressed, albeit a bit slower, but expansion and new to market requirements have paused while market conditions stabilize.


Tower I Emeryville consists of a 12-story multi-tenant office building. Situated close to the San Francisco Bay, the property lies near the Oakland International Airport and enjoys the views of SF Bay, SF skyline, Golden Gate Bridge and Treasure Island. Public transport is easily accessible through Amtrak, AC Transit, and free shuttles connecting Emeryville’s employers and shopping centres with the MacArthur BART station. It offers quick access to Interstate 580 as well, which passes from San Rafael in the Bay Area to Tracy in the Central Valley.

Source: Company



St Louis (7.9% of GRI) As the largest incorporated area within the CBSA and with a population of 310,230 residents, the City of St. Louis is the cultural and economic center of the region. The region’s climbing payrolls in the high-wage industries of logistics and technology have supported a more skilled labor force and improved the area demographics. Although the metro area average household income level is just below the national average, living costs that are 94.0 percent of the national average offset this effect somewhat by boosting

household purchasing power. These factors, combined with a diversified local economy and a relatively low cost of doing business, should favorably position the St. Louis to attract business investment and experience economic growth moving forward. The metro area has experienced a persistent out-migration of its young, college educated population over the last ten years due to a lack of job opportunities, resulting in a smaller pool of available workers. This dry up has placed the brakes on even high-performing healthcare, and manufacturers cannot expect any additional federal stimulus. Housing should bloom late with consumers’ finances in top shape. The metro area has missed out on high-tech growth, but local institutions have the potential to make up lost ground. Longer term, poor population trends will keep the CBSA a step behind the U.S. Longer term, poor population trends will keep the St. Louis CBSA a step behind the U.S. Office Outlook: Looking forward, a subset of tenants may be particularly challenged in a downturn. The square footage of co-working providers has doubled in the last five years, and there are now over 20 providers in the market. As the COVID-19 outbreak impacts the market, some businesses may be forced to make tough decisions about their future.


101 South Hanley consists of a 19-story multi-tenant office building. The property is served by a light rail stop within a short walk. Since ownership of the project, KBS has invested in major upgrades and capital improvements repositioning the building to one of the best amenitized in the market. Nearly $6,200,000 have been invested in new amenities, cosmetic upgrades and building system modernization. The property is near Interstate 170 and Interstate 64 which serve as primary traffic arteries for St Louis Couty and the St Louis metropolitan area. It is also close to Interstate 64, Interstate 170 and Forest Park Parkway. A MetroLink light rail station is 2 blocks away.

Source: Company



Dallas (7.7% of GRI) The Dallas-Fort Worth-Arlington Core-Based Statistical Area (Dallas CBSA) is the economic hub of North Central Texas, with one of the highest concentrations of corporate headquarters in the United States. It is home to a young, affluent, well-educated population, outperforming national demographics in every category. The proportions of the population with bachelor’s degrees and with graduate degrees are higher than the national averages and growing. Its deep pool of well-trained labor will support high-wage industries and encourage corporate relocations and expansions. The resulting in-migration to take new jobs should keep population growth well above the U.S. average. Dallas’ location provides excellent access to both the east and west coasts via its comprehensive transportation network of major interstate highways, rail lines, and air routes. Dallas' costs of living and doing business are in line with the national average, offering an advantage over competing U.S. metros, particularly on the northeast and west coasts. The combination of low taxes, reasonable real estate costs and low gas prices maintain reasonable living and business costs and support in-migration and business relocations. Amidst corporate relocations into the CBSA and significant hiring surges, the regional economy is expected to continue its rapid expansion through the near term. Office Outlook: Construction remains strong in the market. At this juncture, there are no large corporate campuses under development, although build-to-suits for JPMorgan Chase (540,000 square feet) and Uber (469,000 square feet) are underway. The US economic slowdown due to COVID-19 will certainly be felt in Dallas. Overall, Dallas has performed well during recessionary periods, tending to fall later and recover faster than most markets.


Tower 909 is a 19-story, Class A, multi-tenant office building that is part of the Las Colinas planned development. It benefits from being the terminal stop on the Las Colinas’ Area Personal Transit System and is adjacent to Urban Center Station on the DART light rail system via covered pedestrian access. Major tenants include Medallion (5.7% of NLA), Matheson Tri Gas (17% of NLA), and Fleur De Lis Energy (8.1% of NLA). The property is served by a light rail stop.

Source: Company



Philadelphia (7.6% of GRI) Over 6.0 million people call the Philadelphia home, making it the eighth-largest metropolitan area in the United States. The demographic characteristics for the Philadelphia CBSA are strong, highlighted by some of the highest educational attainment levels on the East Coast. The region is home to a variety of highly regarded post-secondary

institutions, which keeps a steady stream of young talent flowing into the region’s labor force each year. In turn, employers that are in need of highly skilled workers and typically pay higher wages are attracted to the region. As such, the Philadelphia CBSA has average and median income levels that are well above the national average. Philadelphia CBSA’s economy is projected to continue to expand and experience strong growth over the next few years. The region’s healthcare, construction, and tourism industries are thriving. Overall, the regional economy is projected to exhibit steady growth, underscored by per annum employment and economic growth rates of 0.5 percent and 1.7 percent, respectively, over the next five years. The region’s stability and strong emphasis on education gives it a positive outlook. The highly educated workforce and diverse private sector will continue to support growth in the region over the long-term. Office Outlook: Proposed new construction projects may encounter delays as tenants navigating a recessionary environment are likely to be more cautious in planning for their future space needs. In the near-term, postponement of potential pipeline will serve to only further tighten vacancy rates and may put pressure on older properties to reposition. Preliminary Census estimates also indicate that the suburbs are sustaining population growth while the city is experiencing a slowdown. If this bears out through 2020 and beyond, then the suburban office market will likely see an uptick in demand reflecting this shifting preference.


CrossPoint is a 3-story, Class A, multi-tenant office building. The property offers good proximity to malls and local highways including Route 202 and Interstate 76. It is also close to the King of Prussia Mall, the second largest mall in the US, a Walmart Supercenter, and the Village at Valley Forge, a live-work-play development which includes Wegman’s, Nordstrom Rack and LA Fitness. The property is served by a shuttle service to a nearby light rail stop.

Major tenants include Teleflex (31% of NLA), Tivo (24%), and Medecision (9%).

Source: Company



San Antonio (6.2% of GRI) San Antonio lags the U.S. in educational attainment and affluence. Its employment base is diverse, with government, trade, transportation and utilities, and education and health services among the top employment sectors. The lack of an educated workforce has been a downside when considering the strong aerospace ties the city possesses that could generate thousands of high-paying jobs. Despite having low business costs, San Antonio’s small concentration of aircraft engineers lowers the likelihood of getting awarded

aerospace projects. Growth of San Antonio will be led by construction, defense-related activity, education, and manufacturing. The large military concentration poses further upside risks as the current administration boosts defense spending. Longer term, the metro area’s above-average population gains, low costs of doing business, and relatively high housing affordability should contribute to above-average overall performance. Office Outlook Over the next several quarters in San Antonio, nearly 700,000 SF of new construction is planned to deliver, at premium asking rates (as high as $54.00 - $55.00 on a full service gross basis) by tenants who signed leases during the end of 2019 and the first quarter of 2020. While the full effects of COVID-19 are uncertain on a national basis, the San Antonio, market is already struggling to navigate the challenges facing the largest tenant industry of oil and gas. In the near term, rental and vacancy rates are likely to be challenged.


Promenade I & II is a 4-story, Class A, multi-tenant office building. It is arguably the highest quality office building constructed in San Antonio in the last 20 years. The high-end finishes, coupled with the proximity to retail, restaurant and hotel services in Eilan provide the subject with a competitive

advantage over other Class A office buildings in the market area. It is within the northwest qradrant of Interstate 10 and Loop 1604, near the region’s top employers and proximate to many affluent executive housing and multi-family residential developments. Notable tenants at the property include Apache (approximately 33% of the space), KPMG and Merrill Lynch.

Source: Company



Appendix II – Prime US REIT’s structure

1. The Manager wholly-owns the Manager US Sub. The Manager has organised the Manager US Sub so that to the extent activities of the Manager, including under the KBS Management Agreement, would be required to be performed within the U.S., those activities will be delegated to the Manager US Sub.

2. Prime US REIT S2 Pte. Ltd. wholly-owns two Barbados entities which are currently dormant. 3. 125 preferred shares have been issued by Parent U.S. REIT to parties who are not related to the Sponsor with a coupon of 12.5%. The

preferred shares are non-voting, non-participating and redeemable at the option of Parent U.S. REIT. The terms of the preferred shares are in accordance with customary terms offered to other accommodation shareholders (which are third party holders required to meet the 100 shareholder test) for U.S. REITs in the United States. The Certificate of Incorporation for Parent U.S. REIT contains provisions that ensure that this 100 shareholder requirement is continuously met at all times required under US tax rules applicable to U.S. REITs.

4. An agreement entered into between the Manager, the Manager US Sub, the U.S. Asset Manager, the Parent U.S. REIT and the Property Holding LLCs.

5. For the avoidance of doubt, there will only be one Upper-Tier U.S. LLC, one Mid-Tier U.S. LLC and one Lower-Tier U.S. LLC. 6. Each Property will be held by an individual Property-Tier U.S. LLC, except that 222 Main will be held by Prime US-222 Main, LLC. 7. For the avoidance of doubt, KBS RA is not a subsidiary of the Manager, and KBS RA does not hold any shares in the Manager (whether

directly or indirectly) and vice versa. The estate of Peter M. Bren (together with other family members) indirectly owns 50.0% of the interests in KBS RA while Charles J. Schreiber Jr. (together with other family members) indirectly controls the remaining 50.0% of the interests in KBS RA. Notwithstanding the foregoing, Charles J. Schreiber Jr. controls the voting rights with respect to the interests in KBS RA held indirectly by the estate of Peter M. Bren.

8. Prime US REIT S3 Pte. Ltd. (“Sing Sub 3”) was incorporated in February 2020 in relation to the acquisition of Park Tower. Utilising proceeds from the private placement completed on 21 February 2020, Sing Sub 3 provided a loan to Prime US-Sub REIT, Inc. to partially finance the acquisition of Park Tower.

Source: Prime

Portfolio interest exemption (PIE) refers to an exemption from 30% U.S. withholding tax on distributions from Prime US REIT to eligible Unitholders attributable to the interest payments from the Parent U.S. REIT to Singapore Sub 2 and 3 (Loan facilities) Requirements under the PIE rule: 1) Unitholders are prohibited

from directly or indirectly owning in excess of 9.8% of the outstanding Units

2) The Unitholder’s investment in the Units is effectively disconnected with its conduct of a trade or business in the United States

Documentations required:

1) IRS Form W-8 to establish status for US Foreign Account Tax Compliance Act (FATCA) and establish eligibility for US PIE

2) US Tax Compliance Certificate to establish eligibility for US PIE.

Implications:

1) If forms are duly submitted, unitholders will receive the full distribution declared by the REIT

2) If forms are not duly submitted or inaccurate/ incomplete information has been provided, a 30% U.S. withholding tax will be applied on the portion of the distribution received through interest paid by the loan facilities.

Both documents are security-specific, and they will need to be received by the manager. (e.g. If a unitholder invests in Prime, he/she will need to submit to the documents to Prime. If the same unitholder invests in Manulife as well, he/she will need to complete the forms again to submit to Manulife.



Financials

Statement of Total Return and Distribution Statement Balance Sheet

Y/E Dec, ($’000) FY18 FY19 FY20e FY21e FY22e Y/E Dec, ($’000) FY18 FY19 FY20e FY21e FY22e

Gross revenue 118,454 133,370 149,675 154,924 158,234 ASSETS

Property expenses (44,105) (45,047) (55,929) (56,619) (56,003) Investment properties 1,222,150 1,254,700 1,424,800 1,424,800 1,424,800

Net property income 74,349 88,323 93,746 98,305 102,231 Total non-current assets 1,222,150 1,254,700 1,424,800 1,424,800 1,424,800

Net Finance (Expense)/Inc. (16,990) (15,475) (12,165) (12,165) (12,165) Trade receivables - 2,411 3,000 2,601 3,120

Manager's fees (6,199) (6,618) (8,564) (8,812) (9,044) Cash 27,459 37,862 35,831 99,921 151,795

Other items (3,849) 1,323 (2,381) (2,381) (2,381) Others 629 2,200 975 2,311 1,045

Net income 47,311 67,553 70,636 74,947 78,641 Total current assets 28,088 42,473 39,806 104,833 155,960

FV change, derivatives & ppties (3,814) 3,634 - - - Total Assets 1,250,238 1,297,173 1,464,606 1,529,633 1,580,760

Total Return Before Tax 43,497 71,188 70,636 74,947 78,641

Taxation (5,455) (11,984) (12,531) (13,295) (13,951)

Total Return After Tax 38,042 59,204 58,105 61,652 64,690 LIABILITIES

Distribution adjustments - (399) 13,630 14,770 15,747 Trade payables 17,231 16,646 17,231 24,830 17,750

Income available for distribution - 55,171 71,736 76,422 80,437 Rent received in advance - 5,061 5,061 6,298 5,459

Others 4,542 752 752 1,049 788

Per unit data Total current liabilities 21,773 22,459 23,044 32,178 23,997

Y/E Dec FY18 FY19 FY20e FY21e FY22e Loans and borrowings 448,558 432,824 432,824 432,824 380,228

NAV (US$) 0.84 0.89 1.07 1.13 1.25 Others 2,440 16,582 16,582 16,582 16,582

DPU (US cents) - 3.15 6.83 7.28 7.66 Total non-current liabilities 450,998 449,406 449,406 449,406 396,810

Total Liabilities 472,771 471,865 472,450 481,584 420,807

Cash Flow

Y/E Dec, ($’000) FY18 FY19 FY20e FY21e FY22e Net assets 777,467 825,308 992,156 1,048,049 1,159,952

CFO Represented by:

Net income 35,707 40,971 58,105 61,652 64,690 Unitholders' funds 777,467 825,308 992,156 1,048,049 1,159,952

Adjustments 25,305 (5,290) 11,337 11,840 12,215

WC changes (1,666) 8,743 1,221 8,197 (7,433)

Cash generated from ops 59,346 44,424 70,664 81,688 69,472

Others 5,899 - - - -

Cashflow from ops 65,245 44,424 70,664 81,688 69,472

CFI Valuation Ratios

Acquisition of investment properties (1,214,157) (1,219,260) (170,100) - - Y/E Dec FY18 FY19 FY20e FY21e FY22e

Capex, net (25,218) (3,646) - - - P/NAV (x) - 1.1 0.7 0.7 0.6

Others - 40 88 88 88 Distribution Yield (%) - 3.3 8.9 9.5 10.0

Cashflow from investments (1,239,375) (1,222,866) (170,012) 88 88 NPI yield (%) 12.1 7.1 7.0 6.9 7.2

Growth & Margins (%)

CFF Growth

Proceeds from issuance of units 813,000 813,000 120,000 - - Revenue 12.6% 12.2% 3.5% 2.1%

Loans, net of repayments 473,776 426,988 (5,433) (5,433) (5,433) Net property income (NPI) 18.8% 6.1% 4.9% 4.0%

Distributions (25,164) - - - - Distributable income - 30.0% 6.5% 5.3%

Others (45,927) (23,700) (17,253) (12,253) (12,253) DPU - - 6.5% 5.3%

Cashflow from financing 1,215,685 1,216,288 97,314 (17,686) (17,686) Margins

NPI margin 62.8% 66.2% 62.6% 63.5% 64.6%

Net change in cash 41,555 37,846 (2,034) 64,090 51,874 Key Ratios

Cash at the start of the period - 1 37,865 35,831 99,921 Net Debt or (Net Cash) 421,099 394,962 396,993 332,903 228,433

Ending cash 41,555 37,847 35,831 99,921 151,795 Gearing (%) 36.7% 34.5% 30.4% 30.4% 26.7%

Source: Company, Phillip Securities Research (Singapore) Estimates



Total Returns Recommendation Rating

> +20% Buy 1

+5% to +20% Accumulate 2

-5% to +5% Neutral 3

-5% to -20% Reduce 4

< -20% Sell 5

Ratings History

PSR Rating System

Remarks

We do not base our recommendations entirely on the above quantitative return bands. We

consider qualitative factors like (but not limited to) a stock's risk reward profile, market

sentiment, recent rate of share price appreciation, presence or absence of stock price

catalysts, and speculative undertones surrounding the stock, before making our final

recommendation

1 2 3 4 5

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jul-19

Oct-1

9

Jan-20

Ap

r-20

Jul-2

0

Oct-20

Jan-2

1

Ap

r-21

Jul-21

Oct-2

1

Jan-2

2

Ap

r-22

Jul-22


Market PriceTarget Price



Contact Information (Singapore Research Team)

Head of Research Research Admin Paul Chew – [email protected] Siti Nursyazwina - [email protected]

Property | REITs Small-Mid Cap Banking & Financials | Healthcare Natalie Ong - [email protected] Tan Jie Hui - [email protected] Tay Wee Kuang - [email protected] Technical Analyst China/HK Equity Credit Analyst (Bonds) Chua Wei Ren – [email protected] Zheng Jieyuan – [email protected] Timothy Ang – [email protected]

Contact Information (Regional Member Companies) SINGAPORE

Phillip Securities Pte Ltd Raffles City Tower

250, North Bridge Road #06-00 Singapore 179101 Tel +65 6533 6001 Fax +65 6535 6631

Website: www.poems.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd

B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 50450

Kuala Lumpur Tel +603 2162 8841 Fax +603 2166 5099

Website: www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong

Tel +852 2277 6600 Fax +852 2868 5307

Websites: www.phillip.com.hk

JAPAN

Phillip Securities Japan, Ltd. 4-2 Nihonbashi Kabuto-cho Chuo-ku,

Tokyo 103-0026 Tel +81-3 3666 2101 Fax +81-3 3666 6090

Website: www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta 10220 – Indonesia

Tel +62-21 5790 0800 Fax +62-21 5790 0809

Website: www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co Ltd

No 550 Yan An East Road, Ocean Tower Unit 2318,

Postal code 200001 Tel +86-21 5169 9200 Fax +86-21 6351 2940

Website: www.phillip.com.cn

THAILAND

Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building,

849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel +66-2 6351700 / 22680999 Fax +66-2 22680921

Website www.phillip.co.th

FRANCE King & Shaxson Capital Limited

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel +33-1 45633100 Fax +33-1 45636017

Website: www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Capital Limited

6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS

Tel +44-20 7426 5950 Fax +44-20 7626 1757

Website: www.kingandshaxson.com

UNITED STATES

Phillip Capital Inc 141 W Jackson Blvd Ste 3050

The Chicago Board of Trade Building Chicago, IL 60604 USA Tel +1-312 356 9000 Fax +1-312 356 9005

Website: www.phillipusa.com

AUSTRALIA Phillip Capital Limited

Level 10, 330 Collins Street Melbourne, Victoria 3000, Australia

Tel +61-03 8633 9803 Fax +61-03 8633 9899

Website: www.phillipcapital.com.au

CAMBODIA Phillip Bank Plc

Ground Floor of B-Office Centre, #61-64, Norodom Blvd Corner Street 306, Sangkat Boeung Keng Kang 1, Khan Chamkamorn,

Phnom Penh, Cambodia Tel: 855 (0) 7796 6151/855 (0) 1620 0769

Website: www.phillipbank.com.kh

INDIA

PhillipCapital (India) Private Limited No.1, 18th Floor, Urmi Estate 95, Ganpatrao Kadam Marg

Lower Parel West, Mumbai 400-013 Maharashtra, India

Tel: +91-22-2300 2999 / Fax: +91-22-2300 2969 Website: www.phillipcapital.in

TURKEY PhillipCapital Menkul Degerler

Dr. Cemil Bengü Cad. Hak Is Merkezi No. 2 Kat. 6A Caglayan 34403 Istanbul, Turkey

Tel: 0212 296 84 84 Fax: 0212 233 69 29

Website: www.phillipcapital.com.tr

DUBAI Phillip Futures DMCC

Member of the Dubai Gold and Commodities Exchange (DGCX)

Unit No 601, Plot No 58, White Crown Bldg, Sheikh Zayed Road, P.O.Box 212291

Dubai-UAE Tel: +971-4-3325052 / Fax: + 971-4-3328895

mailto:[email protected]







http://www.poems.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipusa.com/

http://www.phillipcapital.com.au/

http://www.phillipbank.com.kh/

http://www.phillipcapital.in/

http://www.phillipcapital.com.tr/



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