Keppel Pacific Oak US REIT - RHB Invest 2020-04-13: Navigating Rough Seas; Keep BUY


Keppel Pacific Oak US REIT - Navigating Rough Seas; Keep BUY

  • COVID-19’s impact on Keppel Pacific Oak US REIT (SGX:CMOU)’s office portfolio is mitigated by a diversified asset/tenant base and reasonably long portfolio weighted average lease to expiry ( > 4 years).
  • While overall office demand is expected to take a near-term hit, we expect demand in tech markets – to which Keppel Pacific Oak US REIT has most exposure – to hold up relatively well. The recent finalisation of tax regulations should provide some savings.
  • Valuations are relatively cheap at 0.6x P/BV.
  • Keep BUY with a new USD0.76 Target Price (from USD0.88), 43% upside and c.11% yield.

Operational updates.

  • Management updated during a recent call that, while it has not received any rent rebate requests so far, it expects such requests from some tenants in the near term. For such cases, Keppel Pacific Oak US REIT’s strategy will be to evaluate the requests on a case-by-case basis. If needed, it may work with some tenant to provide rent relief to maintain long-term relationships and avoid bankruptcies.
  • The retail segment (mainly cafes in office buildings) has been the worst hit, but accounts for < 1% of overall income. While some rightsizing in the professional services sector and tenant movements are expected, the proportions of such are expected to be rather low.

Limited FY20 lease expiries and minimal tenant concentration risks.

  • Only c.7% of leases by rental income are due for renewal in FY20 – mostly in Seattle, Denver, and Austin – of which a portion were already renewed by February at positive (low double-digit) rent reversions. Office leasing has paused since then, and rent is expected to come under pressure.
  • With Keppel Pacific Oak US REIT’s expiring rent on average 10- 15% below market rates (before the COVID-19 crisis), it has some leeway in lowering rent. Tenant concentration risks remain minimal, with Top 10 tenants accounting for only 19.4% of the total, with no sector accounting for > 30% of the portfolio.

Finalisation of tax regulations to result in tax savings.

  • The final regulations related to Section 267A of the US Internal Revenue Code were announced on 7 Apr. Based on these final regulations, Keppel Pacific Oak US REIT should be able to revert its tax structure to the one in place during its listing, ie without the need for the Barbados entity it currently has. The move should result in annual tax savings of c.1.5%.

No balance sheet concerns.

Earnings and TP changes.

  • We have lowered our FY20F-22F DPU 3-5% by factoring in some vacancies and lowering rent. Our COE is also raised 70bps to 9.7% to factor in increased market risks.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.76 DOWN 0.880