KEPPEL PACIFIC OAK US REIT (SGX:CMOU)
Keppel Pacific Oak US REIT - Undervalued Play On US Office Sector; BUY
- KEPPEL PACIFIC OAK US REIT (SGX:CMOU)’s FY19 results are in line with our/Street estimates. Its office portfolio continued to see strong rental uplift (FY19 – 14.3%), riding on tech-led demand growth – this momentum is set to continue in 2020. See Keppel Pacific Oak US REIT Announcements.
- This stock is a laggard play on the US office sector, with peer share prices rallying over the last three months. (see Share Price Performance - S-REITs Sector.) Its valuation remains undemanding, at 0.9x FY20 P/BV.
- Maintain BUY, target price, 16% upside and c.8% yield. See Keppel Pacific Oak US REIT Target Price.
Strong double-digit rent growth (~17%) in 4Q for leases signed.
- Keppel Pacific Oak US REIT’s portfolio continued to benefit from the underlying growth momentum in office demand from its tech markets of Seattle, Austin and Denver, with a positive rent reversion of 14.3% for FY19(4Q19: + c.17%). About 228,000sqf (~5% of total NLA) was leased during the quarter – with the bulk (~70%) being office properties in the above-mentioned tech hubs. In addition, its leases have inbuilt rent escalations of 2.6% pa, thereby providing good organic growth.
- For FY19, new leases (25%) and expansions (14%) accounted for ~39% of leases signed, indicating growing office demand. The strong positive rent growth underpins our investment thesis of Keppel Pacific Oak US REIT’s under-rented portfolio (c.15% below the weighted average asking rate) and favourable demand-supply dynamics in its key tech markets (Seattle, Austin and Denver) which accounts for ~75% of total portfolio.
- About 8% of leases (by NLA) are due for renewal by end-2020, for which we expect high single digit rental growth.
Slight dip in portfolio occupancy rate, but this should improve in FY20.
- Keppel Pacific Oak US REIT’s overall portfolio committed occupancy rate dipped to 93.6% (-0.2ppt q-o-q), mainly on the ~5ppt occupancy decline in The Westpark portfolio. We expect this decline to be temporary, in view of the strong demand and limited supply in the Redmond area.
- Portfolio weighted average lease expiry (WALE) remained healthy at 4.2 years with minimal tenant concentration risks (largest tenant accounts for only 3.5% of cash rental income).
More acquisitions likely in FY20.
- Post the recent acquisition of One Twenty Five (OTF), Dallas and associated placements, Keppel Pacific Oak US REIT’s exercise gearing remains relatively comfortable at 36.9%, providing ~USD80m in debt headroom (assuming 40% levels). With US office market fundamentals remaining strong and the low interest rate environment still in place, we believe management will continue to selectively look into acquisitions in FY20 to strengthen its portfolio.
- Management had earlier guided that USD100-200m pa is an indicative acquisition range.
DPU adjustments.
- We introduce our FY22 forecasts and cut FY20-21F DPU by 1-2%, by adjusting our occupancy rate assumptions. See Keppel Pacific Oak US REIT Target Price; Keppel Pacific Oak US REIT Dividend History.
- We have also reduced our COE assumptions in our model by 10bps.
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-01-22
SGX Stock
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0.880
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