Keppel Pacific Oak US REIT - RHB Invest 2020-07-24: Marching On Despite COVID-19; Keep BUY

KEPPEL PACIFIC OAK US REIT (SGX:CMOU)

Keppel Pacific Oak US REIT - Marching On Despite COVID-19; Keep BUY

Keppel Pacific Oak US REIT posted a strong set of 1H results with DPU coming in slightly ahead of our expectations.
COVID-19’s impact on Keppel Pacific Oak US REIT’s portfolio remains muted so far. A lot of positives could be gleaned through in 1H operational data with fairly steady leasing momentum resulting in occupancy improvements and double-digit rent reversions.

A risk remains the impact on the US economy from the bout of a second COVID-19 wave.

Keppel Pacific Oak US REIT (SGX:CMOU)'s 1H DPU up 3.3% y-o-y aided by positive rental reversions seen in previous quarters, rental escalations and contribution from One Twenty Five in Dallas, which was acquired in Nov 2019. See Keppel Pacific Oak US REIT Announcements.
Management noted that it has chosen to maintain 100% payout ratio as rental collections remain fairly healthy at 94% for 1H20 and it doesn’t see any major risk of tenant defaults.

Keppel Pacific Oak US REIT has received rent relief requests from c.15% of its tenants by Cash Rental Income (CRI) and only 5.7% of them have been granted rent deferrals resulting in a c.2.8% economic impact.
Co-working tenants in its portfolio remain small at c.2% of total CRI. Rent deferrals to office tenants were generally 0.5 months of rent, to be repaid over the next 12 to 18 months.
For retail tenants ( < 2% of CRI) rent relief was generally one full month and up to four months for certain tenants with leases being extended for the length of the deferral in some cases.
Management noted that despite a surge of a second wave of COVID-19 cases in its markets like Texas and Florida, it hasn’t seen any spike in rent relief requests so far.

In 2Q, Keppel Pacific Oak US REIT signed c.92,000 of leases (2% of total NLA, 1H20: 196,000 sqft) despite a COVID-19 fallout, with majority of them signed across Seattle, Atlanta and Houston. New leases (35%) and expansions (17%) accounted for more than half, with the tech sector still being the key demand driver. The strong leasing resulted in occupancy improving to 94.3% from 93.6% as of Dec 2019.
Rental reversion for 1H came in strong at +14.7% (2Q: +18%) despite COVID-19, highlighting Keppel Pacific Oak US REIT’s under-rented portfolio and strong-asset attributes.
Keppel Pacific Oak US REIT guided that current in place average rents is still about 10.8% below asking rents and expects overall rental reversions to remain slightly positive in coming quarters barring a severe impact from a second COVID-19 wave.

Keppel Pacific Oak US REIT has refinanced USD115m of IPO loans maturing in Nov 2021 at a much lower interest rate, resulting in a 15bps reduction in overall interest costs to 3.19% pa. Currently Keppel Pacific Oak US REIT has no long-term refinancing requirements until Nov 2022. All of its loans are unsecured with a healthy interest cover of 4.4x.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-07-24

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