Keppel Pacific Oak US REIT - RHB Invest 2019-09-06: New Name, Yet Same Attractive 8% Yield; BUY


Keppel Pacific Oak US REIT - New Name, Yet Same Attractive 8% Yield; BUY

  • Maintain BUY and USD0.88 Target Price, 19% upside plus c.8% yield.
  • Despite concerns over the rising US China trade tensions, we believe KEPPEL PACIFIC OAK US REIT (SGX:CMOU)’s office portfolio, which mainly focuses on US technology hubs, will stay resilient and continue to outperform the broader market.
  • The changes announced in name and trust structure are more cosmetic in nature, and should not have any operational impact.
  • Valuations are attractive at 0.9x P/BV and 8.3% yield – healthy at > 300bps spread compared to Singapore Office REITs.

No operational changes expected from reorganisation.

  • KEPPEL-KBS US REIT (SGX:CMOU) announced a change of name to KEPPEL PACIFIC OAK US REIT (SGX:CMOU), with plans underway to enter into a new outsourcing management agreement with a new US asset manager, Pacific Oak Capital Advisors LLC.
  • The new outsourcing management agreement will be substantially on the same terms as the existing one. No operational impact is expected as the asset manager (the Core Plus team), and the REIT’s management team are expected to remain the same, post changes.
  • In our view, the impending reorganisation will help investors draw a clear distinction between Keppel Pacific Oak US REIT and its peer, PRIME US REIT (SGX:OXMU). Keppel Pacific Oak US REIT will also continue to have the “first-look opportunity” over assets in the Strategic Opportunity Series for acquisitions.

Healthy positive rent reversions expected to continue.

  • Portfolio average rent of leases expiring in 2019-2021 are in the USD22-22.50 range, c.15% below the weighted average asking rents of USD26 psf. About 35% of portfolio leases by cash rental income (CRI) are due for renewal up until 2021, for which we expect mid-to high-single digit rental reversion. In addition, the leases have an in-built rent escalation of ~3% pa.

Acquisition on the cards.

  • Management has guided for potential c.USD100m in acquisitions later this year, depending on market conditions. Potential target locations include sub markets of key growth cities like Austin, Denver, Salt Lake City, Charlotte, and North Carolina, where office capitalisation rates (6-7%) are still attractive.
  • With a limited debt headroom, we expect funding to be via a combination of debt and equity (placement/preferential offerings).

Potential upside from a rollback in tax structure changes not factored in.

  • There has been a slight delay in the finalisation of the proposed US tax regulations (announced in Dec 2018) that were expected to be completed by Jul 2019. The regulations, when finalised (under the current form), should be positive to Keppel Pacific Oak US REIT as it should help in additional tax savings of ~2% (which is the tax paid in the Barbados entity).
  • Management noted that such tax structure changes will incur a minimal one–off cost ( < USD 1m), and can be completed within 1-2 months upon finalisation.

Vijay Natarajan RHB Securities Research | 2019-09-06
SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 SAME 0.88