Keppel Pacific Oak US REIT - RHB Invest 2020-06-08: Exceeding Expectations So Far; Keep BUY


Keppel Pacific Oak US REIT - Exceeding Expectations So Far; Keep BUY

  • We recently hosted a virtual non-deal roadshow for Keppel Pacific Oak US REIT, for Malaysian investors. Management is confident that, despite the sudden shift in office space outlook due to COVID-19, Keppel Pacific Oak US REIT can better weather the crisis due to its asset quality and choice submarkets, limited near-term lease expiries, and diversified tenant base.

Superior yields vs Singapore peers.

  • Keppel Pacific Oak US REIT (SGX:CMOU)’s FY21F yield of 8.3% is > 300bps higher than the Office S-REIT average, and at a 20bps premium to the US office S-REIT average. With its recent inclusion into MSCI Singapore Small Cap Index and FTSE All World Small Cap Index, we expect trading liquidity to further improve and result in yield compression.

COVID-19 impact.

  • Keppel Pacific Oak US REIT has received requests for rent deferrals from 14% of its tenants so far, which are being evaluated on a case-by-case basis. Retail and F&B operators, which account for < 2% of its portfolio, are among these. Management has granted most of them a 3-month rental deferral, which will be added to their end-of-lease tenures. For other tenants that have been directly impacted (eg tourism & hospitality, dentists, cosmetologists), management plans to offer deferrals of up to three months, which are to be repaid over the next 12-18 months.
  • Rent collection has been healthy, with > 90% of rent received for April and May exceeding management’s expectations. Oil & gas tenants account for < 1% of rental income.
  • On concerns over the rising work-from-home trend in the tech sector, management does not foresee a drastic shift among such tenants, and expects people to slowly return to the office.

Only 6% of leases by rental income

  • are due for renewal in FY20 (and 14% in FY21). This mitigates concerns of a potential spike in vacancies.
  • In 1Q20, Keppel Pacific Oak US REIT signed leases for 2.2% of its total portfolio with a rental reversion of 12%, indicating a healthy office market before COVID-19 struck.
  • While the leasing momentum has nearly decelerated to a pause in 2Q20, Keppel Pacific Oak US REIT’s average portfolio rental – which were 10-15% below market rates (pre-COVID-19) – offers some leeway to adjust rental rates.

Latest economic data shows positive green shoots.

  • In a surprising turnaround, May’s job data showed that non-farm payrolls rose by 2.5m and the unemployment rate dropped to 13.3%, vs the market’s expectation of 19.5%. The move comes as many US states gradually ease lockdown measures – which should boost sentiment on the office segment.

Gearing remains modest at 36.9%.

We raise FY20-22F DPU by 1-3%

  • We raise FY20-22F DPU by 1-3% by tweaking our occupancy outlook (+1- 2ppt), vs our initially bearish ~5-7ppt decrease over the next two years.
  • Keep BUY, new target price of USD0.80 from USD0.76, 11% upside with c.8% FY20F yield.
  • Key catalysts: better-than-expected economic recovery and recent index inclusions.
  • Keppel Pacific Oak US REIT is highlighted as one of the RHB's Top Singapore Small Cap Companies - 20 Jewels 2020 Edition.

Vijay Natarajan RHB Securities Research | 2020-06-08
SGX Stock Analyst Report BUY MAINTAIN BUY 0.80 UP 0.760