KEPPEL PACIFIC OAK US REIT (SGX:CMOU)
Keppel Pacific Oak US REIT 3Q22 - Deeply Discounted & Pondering Share Buyback
- Keppel Pacific Oak US REIT's gross revenue grew 3.2% y-o-y in 3Q22 due to the acquisition of Bridge Crossing in Nashville and 105 Edgeview in Denver, which was completed on 20 Aug 21. Distributable income dropped 8.1% y-o-y due to the change in policy to pay 100% of management fees in cash.
- Keppel Pacific Oak US REIT has a unique strategy of focusing on growth cities benefitting from in-migration.
- Keppel Pacific Oak US REIT provides an attractive 2023 distribution yield of 9.7%. The stock trades at P/NAV of 0.66x (34% discount to NAV per unit). Maintain BUY. Target price: US$0.74.
Keppel Pacific Oak US REIT (KORE)'s 3Q22 Results
- Keppel Pacific Oak US REIT (SGX:CMOU) reported distributable income of US$14.6m (-8.1% y-o-y) for 3Q22, which is slightly below our expectations. The decline was largely due to Keppel Pacific Oak US REIT changing its policy to pay 100% of management fees in cash starting 2Q22, instead of the previous policy of paying 100% of management fees in units.
- Continued growth from magnet cities. Gross revenue increased 3.2% in 3Q22 with growth from the acquisition of Bridge Crossing in Nashville and 105 Edgeview in Denver (completed on 20 Aug 21), partially offset by the divestment of Northbridge Center I & II in Atlanta (completed on 28 Jul 22). Adjusted distributable income grew 2.1% y-o-y.
- Organic growth from positive rental reversion and rental escalation. Keppel Pacific Oak US REIT achieved positive rental reversion of 5.3% for 3Q22 (1H22: 1.6%) driven by The Plaza Building and The Westpark Portfolio at Seattle (Bellevue/Redmond) and Bellaire Park in Houston. In-place passing rents remain 5% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion. It continues to benefit from built-in annual rental escalation of 2.5% across its portfolio.
- Portfolio occupancy improved 0.5ppt q-o-q to 92.5% in 3Q22. Occupancy at The Plaza Building at downtown Bellevue improved 3.0ppt q-o-q to 93.6% after Keppel Pacific Oak US REIT secured two new tenants — an insurance company and a software company. Occupancy at Bellaire Park has also improved 2.5ppt q-o-q to 94.8%. Occupancy at The Westpark Portfolio eased slightly by 1.5ppt q-o-q. We expect the transitory vacancy at The Westpark Portfolio to be backfilled given that Redmond is a strong sub-market with low vacancy of 1.7% and majority of new supply are built-to-suit or pre-committed.
- Excluding Powers Ferry, portfolio occupancy would be higher at 93.2%.
- Clever and early refinancing. Keppel Pacific Oak US REIT secured a new loan facility of US$180m in Jul 22, which was utilised to refinance borrowings of US$130m due in Nov 23 and Jan 24 and partially repay outstanding revolving credit facility. Average term to maturity increased from 2.7 to 3.9 years after the refinancing. Currently, KORE does not have any refinancing requirements until Nov 24.
- Healthy balance sheet. Aggregate leverage was stable at 37.5% and well within the regulatory limit of 50%. All-in cost of debt increased 0.2ppt q-o-q to 3.1% after the refinancing. 76.8% of Keppel Pacific Oak US REIT’s borrowings are hedged to fixed rates. Management estimated that a 50bp increase in LIBOR/SOFR would reduce DPU by 0.067 per year.
Rents at magnet cities registering faster pace of growth.
- According to CoStar Office Report, average growth in rents for growth markets was 1.3% over the past 12 months as of Sep 22, faster than 0.2% for gateway cities. Average growth in rents for growth markets is projected to accelerate to 2.3% over the next 12 months. Notable increases were seen at Denver, Northwest +3.7%, Denver, Broomfield +3.4%, Houston, Bellaire +2.7% and Orlando, Maitland +3.3%.
Portfolio optimisation.
- Keppel Pacific Oak US REIT has completed the divestment of Northbridge Center I & II in Atlanta, Georgie for US$22.1m (16.9% above valuation as of Dec 21) on 28 Jul 22. We expect Keppel Pacific Oak US REIT to recognise a small divestment gain of US$1.6m in 3Q22.
- Keppel Pacific Oak US REIT has also signed a sale & purchase agreement to divest Powers Ferry in Atlanta, Georgie (valuation: S$15.7m). In aggregate, Northbridge Center I & II and Powers Ferry contribute 2.7% of the group’s net property income as of Jun 22.
- Proceeds from the divestment of Northbridge Center I & II and Powers Ferry could be utilised for:
- reinvesting in office properties in growth markets, or
- share buyback.
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 whereby the main office is located in gateway cities with satellite offices in key growth markets.
Keppel Pacific Oak US REIT – Earnings forecast revision and recommendation
- We cut our DPU forecast for Keppel Pacific Oak US REIT by 8% for 2023 and 7% for 2024 due to the change in policy to pay 100% of management fees in cash starting 2Q22.
- Unique value proposition of growth and yield. We like Keppel Pacific Oak US REIT for its exposure to suburban office (77% of portfolio valuation) and Sun Belt states (38% of portfolio valuation). Keppel Pacific Oak US REIT provides an attractive 2023 distribution yield of 9.7%. The stock trades at P/NAV of 0.66x (34% discount to NAV per unit).
- Maintain BUY. Our target price of US$0.74 is based on DDM (cost of equity: 9.0%, terminal growth: 2.2%).
- See
- Catalysts:
- Growth from Super Sun Belt and 18-hour cities driven by in-migration.
- Growth from continued positive rental reversion and built-in annual rental escalation.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-10-28
SGX Stock
Analyst Report
0.74
DOWN
0.800
