Keppel Pacific Oak US REIT - RHB Invest 2020-10-23: Delivering On Its Promises


Keppel Pacific Oak US REIT - Delivering On Its Promises

  • Keppel Pacific Oak US REIT posted a strong set of 3Q numbers with healthy double digit rent reversions. We hosted a post results virtual company meeting with our regional investors.
  • Management shared that despite a prolonged COVID-19 pandemic, it expects its US office portfolio to stay resilient, backed by good fundamentals in its submarkets, a diversified tenant base and low expiring rents.
  • Keppel Pacific Oak US REIT's valuations are attractive with a FY20F yield of 8.7%, higher by more than 300bps than the yield for office S-REITs.

Keppel Pacific Oak US REIT's 3Q distributable income rose 19% y-o-y

  • Keppel Pacific Oak US REIT (SGX:CMOU)'s 3Q distributable income rose 19% y-o-y driven by contributions from One Twenty Five in Dallas, (acquired in Nov 2019), portfolio occupancy improvement, rental growth and escalations.
  • We have revised up our Keppel Pacific Oak US REIT's FY20- 22F DPU by 1-3% factoring in a stronger occupancy and rent growth but lowered our longer-term growth outlook in light of COVID-19 uncertainties.

Positive rent reversions expected to continue.

  • Keppel Pacific Oak US REIT’s portfolio registered a strong year-to-date rent reversion of +14% underpinned by low expiring rents and good location attributes. As the rents currently in-place are still at a c.10% discount to asking rents, management expects positive rent reversions to continue in 2021 but in the mid to high single digit range.
  • Portfolio occupancy however declined 1.5ppt q-o-q to 92.8% driven by occupancy decline in Westech 360, Northridge Center I&II and The Plaza buildings. This was due to a non-renewal of some of the leases and limited leasing activities in light of COVID-19 restrictions.
  • Office demand is still mainly driven by the tech and professional services sector and Keppel Pacific Oak US REIT is willing to sign some short-term leases (of 1-2 years) in the near-term, in order to help tenants tide through the current market uncertainties.
  • About 1% and 13% of Keppel Pacific Oak US REIT's leases are due for renewal in FY20 and FY21 and we expect overall occupancy to remain > 90%.

Healthy rent collections, minimal rent deferment requests.

  • Rental collection in 3Q stands healthy at 98% (9M: 98.5%) surpassing its own expectations. Rent deferment requests have eased in 3Q and management expects minimal requests ahead, barring a prolonged pandemic.
  • Overall rent deferments have been granted for c.6% of its portfolio (by rental income) with many of these rents already commencing scheduled repayments and rental relief impact of c.1.1% of 9M NPI (mainly retail tenants).
  • Keppel Pacific Oak US REIT has minimal exposure to retail ( < 2%), co-working (c.2%) and oil & gas tenants ( < 1%) which have been affected since start of the year.

Acquisitions likely in 2H21 for Keppel Pacific Oak US REIT

Vijay Natarajan RHB Securities Research | 2020-10-23
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