Keppel-KBS US REIT - DBS Research 2018-07-18: Core Operations Ahead

Keppel-KBS US REIT - DBS Group Research Research 2018-07-18: Core Operations Ahead KEPPEL-KBS US REIT SGX:CMOU

Keppel-KBS US REIT - Core Operations Ahead

  • 2Q18 DPU of 1.50 Scts, 0.7% ahead of prospectus forecast. 
  • Committed occupancy continues to climb, hitting 90.3%, above earlier guidance of 87.8% for full year. 
  • 5% positive rental reversion achieved in 2Q18 with spot rents still on an upturn. 



Catch the next wave.

  • We maintain our BUY call and Target Price of US$0.95 for Keppel-KBS US REIT (KORE). The stock offers investors the opportunity to catch the next leg of the US office market upturn.
  • The 11 freehold office assets in the initial portfolio are located in seven key regional markets in the US which are seeing positive dynamics and should also benefit from tenants seeking cheaper rents and the flow of capital as investors pursue markets where asset prices have yet to rally as much as some gateway cities. 


Where we differ - Stronger growth profile.

  • Consensus has a modest DPU growth 26.0% below the current average market rents.
  • With c.34% of leases by cash rental income due to expire in FY18 and FY19, Keppel-KBS US REIT is also well placed to capture the expected upturn in rents. Moreover, 97.5% of its leases have in-built rental escalations of 2-3% per annum. 


Backed by reputable Sponsors.

  • Keppel-KBS US REIT’s two Sponsors are Keppel Capital (the asset management arm of Keppel Corporation Limited (SGX:BN4)), and KBS (a premier US investment manager, ranked the eleventh largest US owner of office properties globally). Their proven capability and KBS’s wealth of transactional experience, implies that acquisitions will be a key long-term growth driver. 


Valuation: 

  • We maintain our DCF-based Target Price of US$0.95. This is based on a WACC of 6.6% and terminal growth rate of 2.5%. 


Key Risks to Our View: 

  • The key risk to our view is lower-than-expected rental income, arising from loss of tenants or slower upturn in spot office rents, and changes to tax regulations in the US. 


WHAT’S NEW - Exceeds IPO forecast again


2Q18 DPU in line with our estimates but marginally ahead of prospectus’ forecast

  • Keppel-KBS US REIT's 2Q18 DPU was 2.1% below IPO forecast mainly due to the loss of income from Oracle vacating space in the prior quarter. However, on the back of lower property management expenses and straight lining effects, 2Q18 NPI of US$13.8m exceeded prospectus’ estimate by 1.5%.

Uptick in overall committed portfolio occupancy

  • Overall committed portfolio occupancy as stated earlier improved to 90.3%. This was mainly attributed to higher occupancies at Bellevue Tech Center (95.1% vs 92.3% at end 1Q18), Westmoor Center (82.4% vs 80.3%) and Westech 360 (97.4% vs 95.8%). These improvements were partially offset by declines at The Plaza (88.8% vs 89.3%), Iron Point (97.9% vs 99.5%) and Northridge Center (93.7% vs 95.7%).
  • If the high overall portfolio committed occupancy of 90.3% is maintained for the remainder of the year, there is upside risk to our earnings estimates, given we have assumed an average effective occupancy of 87.8%.

Proactive leasing

  • During 2Q18, Keppel-KBS US REIT signed 32 leases which represented over 220,000 sqft with tenants in the technology, financial, legal and professional services sectors.
  • For these new leases, Keppel-KBS US REIT guided that it achieved positive rental reversions around 14.2% at end 1Q18. 
  • Another 14.6% of leases are also due to expire in FY19.

Steady gearing

  • At end 30 June 2018, aggregate leverage was relatively steady at c.33% with average borrowing cost maintained at 3.4%.
  • The proportion of fixed rate debt was also held at 75%.
  • NAV per unit at end 2Q18 was US$0.88.

Positive rental outlook

  • Based on CoStar’s forecast, Keppel-KBS US REIT remains in a good position to deliver a sustainable increase in DPU in the coming few years.


Maintain BUY, Target Price of US$0.95

  • With Keppel-KBS US REIT’s 2Q18 earnings coming in line with expectations, we maintain our BUY call and Target Price of US$0.95.
  • We continue to like Keppel-KBS US REIT for its exposure to the improving US office market and attractive DPU growth outlook (2-year CAGR of 3.3% between FY18-20F).





Mervin SONG CFA DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-18
SGX Stock Analyst Report BUY Maintain BUY 0.950 Same 0.950



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