Keppel-KBS US REIT - DBS Research 2019-07-17: Riding On U.S. Tech

KEPPEL-KBS US REIT (SGX:CMOU)

Keppel-KBS US REIT - Riding On U.S. Tech

Keppel-KBS US REIT's 2Q19 DPU of 1.50 UScts up 6% y-o-y, in line after applying rights adjustment factor to 1Q18 DPU.
Uplift from recent acquisitions.
9% positive rental reversions and exposure to growing tech demand in Seattle, Austin and Denver to drive c.8% CAGR for DPU over the next three years.
Maintain BUY, Target Price of US$0.90.

KEPPEL-KBS US REIT (SGX:CMOU) reported a 2Q19 DPU of 1.50 UScts which rose 5.8% y-o-y after applying the rights adjustment factor to 2Q18 DPU. With 1H19 DPU of 3.0 UScts (+5.8% y-o-y) representing c.49% of our FY19F DPU, 2Q19 results were in line with our expectations.
The improved performance over the quarter was underpinned by a 29.3% and 30.4% y-o-y growth in 2Q19 revenue and NPI respectively. Keppel-KBS US REIT benefitted from the recent acquisition of Westpark Portfolio, Seattle in November 2018 and Maitland Promenade I in Orlando in January 2019, as well as higher occupancy and positive rental reversions in prior quarters.
Overall portfolio committed occupancy rose to 94.0% from 92.1% in 1Q19 and 90.3% in 2Q18. The largest contributors to the y-o-y increase in occupancy were the Seattle properties. The Plaza achieved 96.5% occupancy in 2Q19 versus 94.2% in 1Q19 and 88.8% in 2Q18. While Bellevue Tech Center’s occupancy was stable q-o-q at 98.5%, it rose from 95.1% in 2Q18. Furthermore, at Westmoor Center (one of Keppel-KBS US REIT’s key properties), Keppel-KBS US REIT was able to drive occupancy to 91.2% from 83.7% in 1Q19 and 82.4% in 2Q18.
Other properties to note include Great Hills in Austin (98.1% versus 96.5% in both 1Q19 and 2Q18) and Powers Ferry in Atlanta (98.0% versus 94.9% in both 1Q19 and 2Q18) which also reported increases in occupancy.

Over the quarter, Keppel-KBS US REIT leased a Seattle 1Q19.
Following 8.8% of the portfolio’s NLA being renewed in 1H19, another 4.8% of leases are up for renewal in 2H19. For FY20 and FY21, another 14.0% and 15.4% of leases are set to expire, respectively.

At the balance date, Keppel-KBS US REIT’s gearing was relatively stable at 3.78%.
The proportion of borrowing on fixed rates remains high at c.77%.
Meanwhile, Keppel-KBS US REIT does not face any significant refinancing until FY21 when 34.1% of debt is due.
NAV per unit stood at US$0.79.

On the back of continued positive net absorption, in general Keppel-KBS US REIT’s key markets should see 1-8% increase in rents for over the coming 12 months, according to Co-Star, a US property consultant.
Meanwhile, Keppel-KBS US REIT’s exposure to Seattle, Austin and Denver (which represents c.60% of the portfolio by gross income), is projected to grow at a faster rate of 4- 8% as they benefit from the strong demand from the technology sector. Beyond the expansion of Amazon and Microsoft whose headquarters are located there, Seattle is also becoming the choice location for other tech giants such as Google, Apple and Facebook. In addition, these technology companies are flocking to suburban neighbourhoods where Keppel-KBS US REIT’s properties are located. Meanwhile, Keppel-KBS US REIT’s Austin properties are expected to benefit from the opening of a new Apple camp.
Thus, we expect Keppel-KBS US REIT to continue reporting positive rental reversions over the next few quarters. This, combined with the boost from Westpark Portfolio and Maitland Promenade I acquisitions, should translate into higher DPUs ahead. We project an c.8% DPU CAGR over the next three years.

With Keppel-KBS US REIT’s 2Q19 result in line with expectations, we maintain our BUY call with a Target Price of US$0.90.
Our favourable view on Keppel-KBS US REIT is premised on its Seattle, Austin and Denver and rising rents.
While Keppel-KBS US REIT’s stock price has soared over 30% year priced, trading on a forward yield of 7.5%.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-17

SGX Stock Analyst Report BUY MAINTAIN BUY 0.900 SAME 0.900