KEPPEL PACIFIC OAK US REIT (SGX:CMOU)
Keppel Pacific Oak US REIT - Return To Work Beneficiary
- Keppel Pacific Oak US REIT's 2Q21 and 1H21 DPU were relatively stable, above our conservative estimates.
- Positives:
- positive rental reversions,
- physical occupancy improved to ~40%,
- potential acquisitions; Negatives: portfolio occupancy decline.
- While recovery remains volatile, 2H21 outlook looks promising as leasing momentum gained traction moving into 3Q21.
Awaiting a turnaround
2Q21 DPU held stable despite some decline in occupancy, above our conservative estimates
- Keppel Pacific Oak US REIT (SGX:CMOU)'s 2Q21 DPU was relatively stable, +1.3% y-o-y to 1.58 Ucents (flat q-o-q), supported by positive rental reversions and built-in annual rental escalations.
- 1H21 DPU was up 1.9% y-o-y to 3.16 Ucents, above our conservative estimates.
- 2Q21 Revenue and NPI declined 5% and 3% to US$34m and US$20m respectively. Adjusted NPI (excluding non-cash straight-line rent, lease incentives and amortisation of leasing commission) was relatively stable (+0.5 % y-o-y) despite some decline in occupancy.
- Gearing declined marginally to 37.1% vs 37.5% in 1Q21. Average cost of debt held stable at 2.8%
- Keppel Pacific Oak US REIT's NAV flat at 0.82 Ucents compared to FY20.
Key Highlights
Occupancy declined further by 1.1ppts partially offset by strong FY20 rental reversions though the quantum has moderated.
- Keppel Pacific Oak US REIT's portfolio occupancies declined further by 1.1 ppt q-o-q to 90.5%.
- Assets that showed a larger decline this quarter include Westmoor Center (-6.7ppts q-o-q) at 90.1%, Iron Point (-3.8ppts) at 92.6%, Westech 360 (-2.2ppts) at 70% and The Plaza (-2ppts) at 91.1%
- Assets which saw occupancy fall to 80% or below include 1800 West Loop (78.7%), Westech (70%), Northridge Center (78.4%) and Powers Ferry (80.1%).
- The silver lining was that 1H21 rental reversions remained positive at 5.4%, though it had moderated q-o-q from 5.7% in 1Q21. Strong rent growth was mainly from Seattle (Bellevue / Redmond) and Austin.
- Although leasing momentum remains muted. We note that Keppel Pacific Oak US REIT has successfully signed a higher number of leases in 2Q (174k sqft vs 128k sqft in 1Q21) while new leases were higher too (50k sqft vs 31k sqft in 1Q21)
- New leasing demand was mainly from the professional services, technology, and finance sectors.
Healthy rental collections; minimal impact from rental relief and deferment.
- Rental collections remained very healthy at 98% in 1H21 vs 98% in 1H21 and 99% in FY20.
- In 1H21, rental deferment requests remain low at ~1% of NLA vs 0.5% of NLA in 1Q21.
Progressive return to work with regional cities seeing close to 50% office visits
- According to the presentation, Texas metro areas are leading in office visits.
- Regional cities such as Houston, Austin and Dallas are achieving close to 50% office visits while the other cities are still showing statistics of between 18% to 30%
Key highlights from the briefing:
- Occupancy decline seen in some of the assets were largely due to businesses being impacted by COVID-19 and some downsizing. However, management is in discussions with prospective tenants to backfill the space.
- Keppel Pacific Oak US REIT has renovated and built spec suites in 1Q21 in view of tenants returning to office in 2H21, which has been gaining interest among tenants.
- Leasing momentum and activities have picked up moving on from 3Q to 4Q. Management hopes this will help to backfill some of the vacancies in the portfolio.
- While management is more optimistic on the recovery in 2H21, management expects occupancy to be relatively stable at these levels and hopefully trend up as corporations are still deciding on their office space requirements. While some tenants have decided to downsize, there were tenants who had reversed on their downsizing decision and will expand instead, which is an encouraging sign in our view.
- Rental reversions are expected to remain in the mid-single digit level in 2H21 while management is hopeful that rental reversions could trend towards high-single digit in FY22F.
- Physical occupancy has improved to more than 40% vs ~20% in 1Q21 as more return-to-office. Texas seems to be leading and Great Hills, Austin saw 100% physical occupancy in July 2021.
- Management targets to make a couple of acquisitions worth around S$100m each this year. Target markets that continue to have positive outlook include Bellevue / Redmond, Denver, Austin, Texas, Salt Lake City, Nashville, and Atlanta. Market cap rates remain relatively stable at 6% to 7% in these target markets.
Maintain BUY; target price of S$0.85.
- We maintain our BUY rating and target price of S$0.85 for Keppel Pacific Oak US REIT. We raised our FY21F-FY22F DI / DPU estimates by 4% to 6% by reducing our overly conservative average cost of debt previously.
- See
Rachel TAN
DBS Group Research
|
Derek TAN
DBS Research
|
https://www.dbsvickers.com/
2021-07-27
SGX Stock
Analyst Report
0.850
SAME
0.850
