Keppel-KBS US REIT - DBS Research 2019-04-17: Benefits From Acquisition Flow Through


Keppel-KBS US REIT - Benefits From Acquisition Flow Through

  • Keppel-KBS US REIT's 1Q19 DPU of 1.50 UScts up 6% y-o-y in line after applying rights adjustment factor to 1Q18 DPU.
  • Boost from acquisition of Westpark portfolio in November 2018 and Maitland Promenade I in January 2019.
  • 10% positive rental reversions underpin growth in future income.
  • Maintain BUY, Target Price of US$0.80.

What’s New

Uplift from recent acquisitions

  • Keppel-KBS US REIT (SGX:CMOU) delivered 1Q19 DPU of 1.50 UScts which represented c.25% of our FY19F DPU and was in line with expectations.
  • After applying the rights adjustment factor to 1Q18 DPU to account for the rights issue in late 2018, 1Q19 DPU was reported to be up 6% y-o-y as Keppel-KBS US REIT benefitted from earnings from the recent acquisition of Westpark portfolio and Maitland Promenade I in November 2018 and January 2019 respectively.
  • The two acquisitions and prior positive rental reversions translated into 1Q19 revenue and NPI both jumping 24% y-o-y to US$29.4m and US$18.2m respectively.

Healthy portfolio occupancy

  • Keppel-KBS US REIT's overall portfolio occupancy remains healthy at 92.1%, up from 91.6% at end-4Q18, driven by marginal increases across the portfolio.
  • The exception was Northridge Center in Atlanta which reported a decline in occupancy to 86.7% from 93.7% in 4Q18. The drop was largely expected due to a non-renewal of tenancy.
  • Due to the healthy demand-and-supply dynamics in Seattle (c.40% of the portfolio by cash rental income), occupancies for Keppel-KBS US REIT’s three key properties Bellevue Tech Center, The Plaza and Westpark portfolio were strong, inching up to 98.5% (98.1% in 4Q18), 94.2% (93.4% in 4Q18) and 97.8% (97.1% in 4Q18) respectively.

Strong rental reversions

  • Over the quarter, Keppel-KBS US REIT reported 10% positive rental reversions anchored by 13-16% increases from leases renewed at its Seattle properties.
  • Leases signed on average also had 3% per annum inbuilt rental escalations which are at the higher end of the typical 2-3% range.
  • Post the signing of 29 leases representing c.203,000 sqft or 4.8% of the portfolio, another 6.4% and 14.9% of leases by cash rental income are up for renewal for the remainder of FY19 and FY20 respectively.
  • A large proportion of the leases that are set to expire for the rest of FY19, relate to the leases at Westpark portfolio, 1800 West Loop and West Loop 1 & II.

Uptick in gearing

  • Following the 100% debt-funded acquisition of Maitland Promenade I in January 2019, gearing rose to 38.1% from 35.1% at the end of 4Q18.
  • Due to the cost of debt in the low 4% related to the Maitland Promenade purchase, Keppel-KBS US REIT’s average cost of debt also rose to 3.76% from 3.53% previously.
  • Meanwhile, the proportion of fixed rate debt remains high at 76.8%.
  • On the back of higher units on issue, NAV per unit fell marginally to US$0.78 from US$0.80.

Maintain BUY, Target Price of US$0.80

  • We maintain our bullish stance on Keppel-KBS US REIT due to the positive outlook for the stock.
  • Specifically, Keppel-KBS US REIT has guided that it could achieve on average high single-digit rental reversions for leases due for renewal for the remainder of the year and CoStar (an independent property consultant) is forecasting 1-7% increase in spot rents across Keppel-KBS US REIT’s key markets.
  • The market has been extremely sceptical of the boost from the recent acquisitions following the disappointment over the rights issue conducted in late 2018. However, we believe with 1Q19 DPU rising 6% y-o-y, some of the market concerns should be allayed.
  • Thus, with Keppel-KBS US REIT trading at attractive valuations, 10% discount to book value during an office upturn and high 8.3% yield, it remains one of our top picks in the S-REIT market and we retain our BUY call with a Target Price of US$0.80.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2019-04-17
SGX Stock Analyst Report BUY MAINTAIN BUY 0.800 SAME 0.800