Keppel Pacific Oak US REIT - RHB Invest 2021-05-05: High Yielding US Office REIT

KEPPEL PACIFIC OAK US REIT (SGX:CMOU)

Keppel Pacific Oak US REIT - High Yielding US Office REIT

Keppel Pacific Oak US REIT (SGX:CMOU)’s portfolio consists of a balanced mix of 13 freehold office buildings and business campuses across eight key growth markets. These markets are driven by innovation and technology in the US.
With a combined asset value of US$1.3bn and an aggregate NLA of over 4.7m sqf, Keppel Pacific Oak US REIT has an extensive and diversified tenant base. Some of these are from growth and defensive sectors, such as technology, and medical and healthcare.

No single asset in Keppel Pacific Oak US REIT’s portfolio accounts for more than 25% of its portfolio’s value. Similarly, no single tenant accounts for more than 4% of rental income, with its Top 10 tenants comprising only 20% of total rental income. In terms of tenant profiles, professional services (28.8%), technology (28.2%), and finance & insurance (21.3%) are the Top 3 tenant segments in its portfolio.
The bulk of Keppel Pacific Oak US REIT’s assets are located in the technology hubs of Seattle, Austin, and Denver. These cities serve as headquarters of several large technology firms and, hence, are expected to be relatively resilient, in our view.

While US office leasing outlook remains murky, we see Keppel Pacific Oak US REIT’s portfolio benefiting from three key factors: focus on technology markets of Seattle and Austin, which have been on an expansionary trend; migration of office tenants to low-cost and low-tax states (Texas, Florida etc.); and minimal tenant concentration risk. The above factors drove positive rent reversion of 10.2% for FY20 (though the pace declined in 2H20) and with asking rents still 8% below market – management expects mid-single digit positive rent reversions for FY21. Only 13% of leases by rental are due for renewal in FY21F-22F.

Gearing remains modest at 37% and management noted that it has been on a lookout for the right acquisition opportunities. It plans to acquire up to US$200m worth of assets in 2021, depending upon the right fit of assets. With a good debt headroom of US$200m (assuming 45% levels) and low borrowing costs, we see room for inorganic growth.
Potential target markets other than its existing markets are key growth cities like Salt Lake City, Nashville, Charlotte, Phoenix etc.

Keppel Capital, the asset management arm of the Keppel Corp (SGX:BN4), owns 50% and 7% stakes in the REIT manager and REIT. Keppel Capital manages assets under management of S$33bn across real estate, infrastructure, and data centres across 30 cities.
Pacific Oak Capital Advisors is the US asset manager for Keppel Pacific Oak US REIT. Aside from providing asset management services, it exclusively sources and manages core real estate for the REIT. Pacific Oak Capital Advisors is also the asset manager for Pacific Oak Strategic Opportunity REIT and Pacific Oak Strategic Opportunity REIT II, which invest primarily in value-add, opportunistic, and core plus real estate that are then asset managed into core status.

Keppel Pacific Oak US REIT's FY20 DPU grew 3.7% y-o-y, aided by positive rent reversions and contributions from One Twenty Five acquired in Nov 2019.
Moving forward, while we expect some volatility in asset occupancies, continued positive rent reversions, and inbuilt rent escalations to continue to drive growth. Overall portfolio valuation also rose 4%, driven mainly by strong gains in its Seattle assets, more than offsetting the decline in other markets.

Keppel Pacific Oak US REIT’s net gearing stands at 36.9%, well below the S-REIT’s threshold of 50%. 100% of its debt is unsecured, and only ~4.4% of debt expires in 2020. Hence, there are no immediate concerns over a potential spike in interest costs.

Keppel Pacific Oak US REIT's CEO David Snyder has a wealth of experience in the US office market and was a consultant to KBS Capital Advisors, where he managed the AFRT portfolio prior to his current role. From 2008 to 2015, Snyder was the Chief Financial Officer of KBS Capital Advisors and five of its non-traded REITs. CFO Andy Gwee has more than 18 years of experience in the accounting, finance, and auditing industry.
Prior to joining the REIT manager, Gwee was the Head of Finance of Keppel DC REIT Management, ie the manager of Keppel DC REIT (SGX:AJBU).

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2021-05-05

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