Keppel-KBS US REIT - RHB Invest 2019-07-18: Key Takeaways From Investor Meeting


Keppel-KBS US REIT - Key Takeaways From Investor Meeting

  • Maintain BUY with USD0.88 Target Price, 7% upside with 7.5% FY19F yield.
  • Yesterday, we hosted a meeting between KEPPEL-KBS US REIT (SGX:CMOU)’s management and institutional investors post-2Q19 results. Key questions were on sustainability of occupancy and rental rate growth, market outlook, tenant retention strategies, potential acquisitions/funding structure and taxes.
  • In summary, management expects strong rental rate growth to continue, with key markets of Seattle, Austin and Denver still in a sweet spot (demand far exceeding supply).

High single-digit rental reversions expected until 2020.

  • Rental growth remains strong, with Seattle assets registering double-digit rental reversions in 1H. Houston is the only market still seeing flattish-to-slightly negative rental growth.
  • While overall rental reversion came in slightly lower q-o-q, this was largely on the nature and timing of lease renewals. Note that rental reversions are on top of rental escalations of ~3% pa.

Rental growth trend is expected to continue in the near term.

  • With most of the incoming supply in its core markets already pre-committed, this rental growth trend is expected to continue in the near term.
  • Portfolio average rentals are still 10-20% below asking rates, so management remains confident of achieving high single-digit rental rate growth until 2020. The majority (60%) of leases due for renewal in 2020 (14% of total leases) are from Seattle assets.
  • While one of its key tenants, Blucora (The Plaza Buildings, Seattle), is expected to leave upon its lease expiry in 2020, two of the building’s tenants have already expressed interest in taking up that vacant space.

Acquisitions and fund-raising.

  • Management sees potential for Austin, Denver, Salt Lake City, Charlotte and North Carolina – where a combination of debt and rights issue in the near term.
  • Gearing is at 38%, implying limited debt headroom of ~USD80m (assuming 40% as a comfortable level).

Potential upside from rollback in tax structure.

  • Keppel-KBS US REIT is currently year-end. Based on the proposed regulations, the REIT should be able to roll back to its IPO tax structure – avoiding the need for a Barbados entity – that is likely to result in additional tax savings of ~2% (which is the tax paid at the Barbados entity).
  • Management noted that such tax structure changes will incur minimal one-off costs ( < USD1m) and can be completed within 1-2 months.

Houston market is stabilising, healthy demand for spec suites.

  • Management addressed investor concerns on Houston’s tenants in the market looking to immediately occupy the space.
  • In 18005% in July, with a temporary tenant leaving the premise – but Keppel-KBS US REIT is in talks with various prospective tenants and expects to backfill the space by year-end.
  • Additionally, asset enhancement works are also currently in progress with the addition of a new cafeteria, tenant lounges and a gym to increase the attractiveness of the asset.

Reasons for listing in Singapore.

  • Management noted that Keppel-KBS US REIT’s relatively small portfolio size and diverse secondary market presence are different compared to US office REITs, which typically have a large portfolio and are focused mainly on gateway cities. (See also report: US Office REITs - Comparison Of Manulife US REIT, Keppel-KBS US REIT, Prime US REIT)
  • When compared to other REIT markets worldwide, Singapore offers a favourable tax structure, transparent policy framework, and has a good international investor base – which was the key reason for choosing to list its assets here.

Potential conflicts of interest with Prime US REIT.

  • The initial assets injected in Keppel-KBS US REIT came from KBS Strategic Opportunity II fund which focuses on assets with a value-add strategy, while Prime US REIT (SGX:OXMU) assets are from KBS REIT III fund, which is based on a core strategy (focused on income, growth and capital preservation). The two funds are operated by two distinct teams with separate reporting lines, and is headed by different independent owners.
  • While there is still a possibility of these two teams competing for the same asset, each team will make their own final independent decisions based on how it fits into their portfolio. As such, overall, it doesn’t see any adverse impact to its current portfolio and acquisition opportunities from the listing of Prime US REIT.

Management fees.

  • Management expects to continue receiving the management fees fully in units in the near-term, until the REIT achieves optimum portfolio growth.

Vijay Natarajan RHB Securities Research | 2019-07-18
SGX Stock Analyst Report BUY MAINTAIN BUY 0.880 SAME 0.880