Keppel Pacific Oak US REIT - DBS Research 2020-06-23: Tech-Up


Keppel Pacific Oak US REIT - Tech-Up

  • Keppel Pacific Oak US REIT’s inclusion in MSCI Singapore Small Cap Index led to strong share price re-rating and greater investor visibility.
  • Quicker adoption of technology post lockdown bodes well for Keppel Pacific Oak US REIT’s unique technology exposure.
  • Expiring leases reduced to 6%; collections and occupancies remain healthy.
  • Maintain BUY; lower Target Price to US$0.85.

Keppel Pacific Oak US REIT – 1Q2020 Operational Update

Contributions from newly acquired One Twenty Five; occupancy steady except for Westech 360; early refinancing of debt expiring in FY21:

  • Keppel Pacific Oak US REIT (SGX:CMOU)'s 1Q2020 revenue and NPI grew 20% y-o-y and 15% y-o-y to US$35m and US$29m respectively, largely due to contributions from One Twenty Five, which was acquired in Nov19.
  • 1Q2020 distributable income (DI) grew 16% y-o-y to US14.4m while estimated DPU rose 3% y-o-y to 1.54 US cts. See Keppel Pacific Oak US REIT Dividend History.
  • Portfolio occupancy was relatively stable at 94% in 1Q2020 vs 93.6% in 4Q2019. Occupancies remained relatively stable except for Westpark Portfolio (+3ppt q-o-q), offset by lower occupancies at Westech 360 (-7.7 ppts q-o-q) and Maitland Promenade (-1.9 ppt). Houston assets (Bellaire Park and 1800 West Loop) saw occupancies improving by 1-2ppts.
  • During the quarter, Keppel Pacific Oak US REIT signed 104k sqft (2.2%) of space mainly in Seattle, Atlanta and Houston with 12% positive rental reversion, thus reducing lease expiries in FY2020 to 5.7% from 7.1% in 4Q2019.
  • Keppel Pacific Oak US REIT has refinanced US$30m (21%) of debt expiring in FY2021 and reduced cost of debt to 3.53% from 3.69% in 4Q2019. ICR improved to 4.8x vs 4.2x previously.
  • Gearing stood at 36.9% with 2.9 years average term to maturity.
  • Following the issue of the final 267A tax regulation, based on FY2019 financials, the reversion to original tax structure is expected to increase distributable income by c.1.5%.

Keppel Pacific Oak US REIT – Updates from COVID-19 impact

Rental collections healthy in Apr; expect retention to increase but vacancies may take longer to fill:

  • Rental collections for the month of April 2020 remained healthy at c.90% level. Thus far, c.10% of tenants have requested for some form of assistance, however, Keppel Pacific Oak US REIT will evaluate the conditions of these tenants.
  • Keppel Pacific Oak US REIT does not expect rental deferments to be significant and expects the level to be much lower than requested. However, F&B tenants, which comprises c.2% of the portfolio, will be given some form of rental assistance of 1 to 2 months during the lockdown period.
  • Management continues to expect that tenants will look to renew their lease rather than to move out during this period, hence, tenant retention should increase and there could also be an increase in shorter-term leases signed. However, management expects vacancies will take longer to fill especially with the slowdown in leasing activities and tours of office buildings.
  • There are no plans to retain dividend at the moment, however, Keppel Pacific Oak US REIT will evaluate this again at the end of 2Q2020 as the COVID-19 impact is expected to hit businesses the hardest in the months of May-June 2020.

Maintain BUY; lower Target Price to US$0.85.

Where we differ: Unique technology exposure.

  • While recognising the disappointment over the rights issue in late 2018, we believe the market has not appreciated Keppel Pacific Oak US REIT’s exposure to Seattle and Austin which represent c.58% of its portfolio by asset value. In addition, the lockdown has led to a push towards quicker adoption of technology / e-commerce, which has led to some expansion in the technology sector.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-23
SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 DOWN 0.900