KEPPEL PACIFIC OAK US REIT (SGX:CMOU)
Keppel Pacific Oak US REIT - 1Q22 Benefitting From In-Migration & Growth In Magnet Cities
- Growth in NPI of 6.7% y-o-y in 1Q22 was attributed to the acquisition of Bridge Crossing in Nashville and 105 Edgeview in Denver, which was completed on 20 Aug 21. Keppel Pacific Oak US REIT provides a unique exposure to in-migration and growth in magnet cities. Growth in rents for growth markets has increased 1.2% in the past 12 months and is projected to increase 3.4% in the next 12 months.
- Keppel Pacific Oak US REIT provides attractive 2022 distribution yield of 8.4% and P/NAV of 0.94x. Maintain BUY with a lower target price of US$1.07.
Keppel Pacific Oak US REIT's 1Q22 Results
- Keppel Pacific Oak US REIT (SGX:CMOU) reported distributable income of US$16.6m (+10.9% y-o-y) for 1Q22, which is in line with our expectations.
- Growth boosted by two newly-acquired properties. Gross revenue and NPI grew 6.9% and 6.7% y-o-y respectively in 1Q22. The better performance is attributed to the acquisition of Bridge Crossing in Nashville and 105 Edgeview in Denver, which was completed on 20 Aug 21.
- Magnet cities provide organic growth. Keppel Pacific Oak US REIT achieved positive rental reversion of 2.4% for 1Q22 (2021: 6.0%) driven by properties located in Seattle – Bellevue/Redmond and Sacramento. Keppel Pacific Oak US REIT signed leases for 146,768sf of office space in 1Q22 (2021: 730,619sf), of which 47% are renewals and 21.1% are expansions. Professional services, finance & insurance and technology, advertising, media & information (TAMI) accounted for 41.3%, 33.4% and 6.3% of new leasing demand and expansions respectively.
- Management expects to maintain positive rental reversion at mid-single-digits in 2022 as in-place rents are 8.9% below asking rents. Growth of Keppel Pacific Oak US REIT’s portfolio is further supported by built-in average annual rental escalation of 2.4%.
- Occupancy rate likely to have bottomed. Portfolio occupancy was stable at 91.7% in 1Q22. Occupancy at Iron Point in Sacramento improved 3.2ppt q-o-q to 90.6% after securing real estate broker Keller Williams as the new tenant. Occupancy at One Twenty Five in Dallas improved 3.4ppt q-o-q to 94.0% after securing United Capital Advisors (subsidiary of Goldman Sachs Personal Financial Management). Newly-acquired Bridge Crossing at Nashville and 105 Edgeview in Denver were fully occupied.
Healthy balance sheet.
- Aggregate leverage was stable at 37.5% and well within the regulatory limit of 50%. All-in average cost of debt has increased 0.13ppt to 2.93%. 84.2% of Keppel Pacific Oak US REIT’s borrowings are hedged into fixed interest rates. Management estimated that every 50bp increase in LIBOR/SOFR reduce DPU per year by 0.062 Ucents. Assuming that the Fed Funds Rate averages 2.5% in 2023, we estimate that average cost of debt will increase to 3.18%. Keppel Pacific Oak US REIT has no long-term refinancing until Nov 23.
Rents in magnet cities started to increase.
- According to CoStar Office Report, average growth in rents for growth markets over the past 12 months was 1.2% as of Apr 22. Notable increases were seen at Sacramento, Folsom +1.7%, Seattle - Eastside Bellevue +2.6%, Seattle - Redmond +2.6%, Orlando, Maitland +3.0% and Austin, Northwest +2.4%. Average growth in rents over the next 12 months is projected to be 3.4%.
- Continue to invest in growth from magnet cities. Keppel Pacific Oak US REIT has presence in six out of the 20 fastest growing states in the US. Management continues to scout for opportunities to invest in growth markets, such as Phoenix in Arizona, Raleigh and Durham in North Carolina, Salt Lake City in Utah, San Antonio in Texas and Tampa and Miami in Florida. Many companies adopt the hub-and-spoke model where they retain their main office in gateway cities but open smaller satellite offices in key growth markets.
- Employees returning to their offices. Sunbelts markets have outperformed gateway cities in workplace occupancy. Austin, Houston and Dallas in Texas have registered high workplace occupancy at 62.4%, 56.3% and 51.8% respectively.
- Asset enhancement for The Plaza Buildings. Keppel Pacific Oak US REIT has hired Pastakia + Associates for permitting and entitlement work on a new five-storey multi-family building in downtown Bellevue atop an existing six-storey car park, which is part of Keppel Pacific Oak US REIT’s The Plaza Buildings. The site is in close proximity to Bellevue Square and downtown Bellevue Station, where light rail service is scheduled to commence in 2023. The redevelopment is in line with Keppel Pacific Oak US REIT’s mandate to invest in commercial assets in key growth markets in the US.
Keppel Pacific Oak US REIT - Earnings forecast revision & recommendation
- We trimmed our 2023 DPU forecast for Keppel Pacific Oak US REIT by 3% due to higher average cost of debt.
- Unique value proposition of growth and yield. Keppel Pacific Oak US REIT provides an attractive 2022 distribution yield of 8.4%. The stock trades at P/NAV of 0.94x.
- Maintain BUY rating on Keppel Pacific Oak US REIT with a lower target price of US$1.07, based on DDM (cost of equity: 7.0%, terminal growth: 1.5%).
- See
- Catalysts:
- Growth from Super Sun Belt and 18-hour cities driven by in-migration.
- Growth from continued positive rental reversion.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-04-21
SGX Stock
Analyst Report
1.07
DOWN
1.100
