Keppel Pacific Oak US REIT - DBS Research 2020-03-25: High-Tech Material

KEPPEL PACIFIC OAK US REIT (SGX:CMOU)

Keppel Pacific Oak US REIT - High-Tech Material

Keppel Pacific Oak US REIT (SGX:CMOU)’s management believes that its portfolio which is largely located in tech hubs should remain resilient as growth and absorption is expected to outpace incoming supply which is largely pre-committed
Current average rents are c.10% below market, providing a sufficient buffer
Tech hubs (c.50% of CRI) continue to offer growth and support; Houston assets (c.15% of income) have a small number of O&G related tenants.

While valuations look attractive, share price could remain volatile as it trades in tandem with US market and sentiment on the US economy

Keppel Pacific Oak US REIT (SGX:CMOU) held its update call yesterday to address the market on the impact of COVID-19 and provide more colour on its portfolio.
To summarise, Keppel Pacific Oak US REIT’s management believes that its portfolio, largely located in tech hubs, will remain resilient as growth and absorption is expected to outpace incoming supply which is largely pre-committed. While activities are expected to slow down in the next few months as the USA battles with the spread of COVID-19, management believes the recovery will be strong and quick.
Current average rents which are c.10% below market provide sufficient income buffer. As such, management believes that its diversified portfolio, largely located in the right submarkets with minimal concentration risks, will remain resilient in this uncertain environment in the near-term.
Keppel Pacific Oak US REIT's share price has fallen by slightly more than half since its peak in Jan-2020 to its lowest level last week. Since then, Keppel Pacific Oak US REIT's share price has rebounded 25% from the low.

Majority of Keppel Pacific Oak US REIT’s tenants have implemented work from home arrangements especially in cities such as Austin that has issued a stay-at-home order. In response to the COVID-19 outbreak, management has increased the cleaning frequency in the buildings.

Management expects leasing activities to slow down as inspection of office buildings has come to a halt and most employees are working from home. Given the uncertain environment, management expects to see more renewals as tenants decide to remain status quo and hence, there will be fewer new leases signed moving forward.

Management continues to believe that its assets in tech hubs (Seattle, Austin and Denver) which contribute c.50% of cash rental income (CRI) will continue to grow with absorption to outpace supply. Vacancies remain very low especially in Seattle and incoming supply is sufficiently pre-leased.
While Houston could likely be a weak market given the drop in oil prices, Keppel Pacific Oak US REIT’s assets in Houston are located in a submarket which is less exposed to the O&G industry and its tenants are largely non-O&G tenants. Management expects rent recovery in its Houston assets will be delayed.

Management believes that the large tech tenants will remain resilient and do not see risks in its top 10 tenants which contribute c.19% of CRI. Smaller tech players contribute c.10% of CRI.

As the COVID-19 outbreak in USA is still in the early stages, only a few of Keppel Pacific Oak US REIT’s tenants have requested for rental support / rebates, comprising largely the F&B tenants which contribute < 1% of CRI. Management does not expect these requests to increase in a big way unless the outbreak is prolonged and the impact is more severe than expected.

In response to comments that there could be structural shift of tenants right-sizing their office needs with a more flexible working arrangement moving forward, Keppel Pacific Oak US REIT’s management believes that its portfolio is less likely to be impacted as majority of its office buildings already offer a work-live-play environment and its tech tenants have flexible work arrangements in place.

In FY2020, only 4.4% of Keppel Pacific Oak US REIT’s debt is expiring, comprising US$21m of uncommitted revolving credit facilities (RCF) drawn. Keppel Pacific Oak US REIT has refinanced c.20% of its debt maturing in FY2021 with the remaining debt maturing in Nov2021. There is c.US$50m of undrawn committed RCF and c.US$20m of uncommitted RCF.

There are currently no plans to change payout ratios or management fees in units.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-03-25

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