KEPPEL-KBS US REIT (SGX:CMOU)
Keppel-KBS US REIT - Right Place, Right Time; Initiate With BUY
- Initiate coverage with BUY and USD0.88 Target Price, 12% upside with 7.8% FY19F yield.
- KEPPEL-KBS US REIT (SGX:CMOU)’s portfolio of 13 freehold US office assets – with properties located across key growth markets – offers investors a good proxy to the rising US office sector. Despite a strong YTD Keppel-KBS US REIT’s share price performance (+29%), we believe Keppel-KBS US REIT is undervalued, given yields of c.8% – a > 250bps spread to Singapore office REITs.
Portfolio geared to booming technology markets.
- Around three quarters of its assets are located in key growth markets: Seattle (53%), Austin, Atlanta, and Orlando. These markets have strongly outperformed the US market on a 5-year average in terms of key office metrics, such as GDP, population, and employment growth. This has immensely benefitted Keppel-KBS US REIT, with healthy improvements seen in occupancy and rent in recent years.
- We see more room for growth, with Costar projecting office rent to grow 3-7% in 2019.
Under-rented portfolio with room for occupancy improvement.
- Keppel-KBS US REIT’s average rent of leases expiring in 2019-2021 are in the USD22-22.50 range, c.15% below the weighted average asking rents of USD26psf. With ~36% of portfolio leases by cash rental income (CRI) expiring by 2021, we see good rental growth potential.
- Additionally, the leases have inbuilt rent escalations of ~3% pa. With continued office demand momentum and limited supply growth in its sub-markets, we also see room for occupancy to increase 2-3ppts from current 92% levels.
Demand for high-quality Class-A office assets remain strong
- While demand for high-A office assets remain strong, we noticed there was good for Keppel-KBS US REIT’s Class-A & B campus-style, especially from technology they provide a more work environment. The assets are reasonably well-located, with amenities and residential neighbourhoods nearby. As such, Keppel-KBS US REIT’s assets should continue to see demand even if market conditions worsen.
Well-diversified tenant base with low concentration risk.
- Keppel-KBS US REIT's top 1019.8% of total CRI. No tenant accounts for > 3% of CRI – providing good diversification.
- While a WALE of 3.9 years is slightly on the lower side vis-à-vis its closest peers, we believe – in the current market conditions – this works in the landlord’s favour in adjusting rent upwards.
Expect more bite-sized acquisitions ahead.
- With current gearing at 38%, there is limited debt headroom of USD80m, assuming a 40% level. We expect more bite-sized acquisitions (USD50-150m) in the near term, with large acquisitions likely to be funded by a combination of debt and equity.
- See attached 29-page initation report in PDF for investment highlights complete analysis on fiancials, valuation and key risks.
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2019-07-12
SGX Stock
Analyst Report
0.88
SAME
0.88
