Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


Keppel Pacific Oak US REIT - Remains Operationally Resilient; Keep BUY

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  • Keppel Pacific Oak US REIT (SGX:CMOU)’s operational numbers in 2Q were in line with our expectations. Headline DPU declined mainly due to switching off entire management fees in cash, from all units previously.
  • Portfolio occupancy improved slightly during the quarter with positive rent reversions, despite volatile market conditions in the US, underlining strength of its assets. Minimal impact is expected from rising interest rates and inflationary pressures.
  • Keppel Pacific Oak US REIT's valuation remains cheap at 0.84x 2022 P/BV.

KORE's 2Q Operational DPU Up 1% Y-o-y

  • Keppel Pacific Oak US REIT's 2Q22 operational DPU up 1% y-o-y while final DPU declined 10% y-o-y on the back of management receiving entire fees in cash instead of units. Keppel Pacific Oak US REIT noted the move is to prevent dilution with its units trading well below NAV as well as to avoid share price pressures from it selling in the market. Management expects fees to be fully paid in cash moving forward.
  • In July, Keppel Pacific Oak US REIT also entered into a new US$180m loan facility to refinance early its loans maturing in Nov 2023 and Jan 2024 which should remove any financing requirements until Nov 2024. The loan pricing is competitive in the current environment in our view, with overall financing costs (excluding upfront amortisation costs) expected to increase only by 10bps to 2.8% and will lengthen its debt maturity to 4.1 years (from 2.8 years currently). 84% of its debt is fixed with every 50bps increase impacting DPU by ~-1%.

Divesting Powers Ferry and Northridge Center I & II

  • Divesting Powers Ferry and Northridge Center I & II at a price above their latest valuations (estimated 5-10% premium, exit cap rates mid 6%). These two were the smallest assets in Keppel Pacific Oak US REIT's portfolio with a combined value of US$34.6m, and were underperforming assets thus, we see the transaction as a positive move. The deal is expected to close during this quarter.
  • Keppel Pacific Oak US REIT's gearing post divestment is expected to be ~36%, providing US$100-150m debt headroom for acquisitions. Management remains on active lookout for acquisitions in key growth markets.

Operating Metrics Remain Positive

  • Rent reversion (1H) stood at +1.6% (1Q: +2.4%). Keppel Pacific Oak US REIT's management noted that 2Q rent reversions were mainly dragged down by signing off a temporary lease for one of its existing tenants. Excluding this one off, rent reversion for 2Q/1H would be +4.5%/3.9%. Reversions are expected to remain positive in 2H in low single digits.
  • Keppel Pacific Oak US REIT's only has 6.3%/16% of leases due for renewal in 2H/FY23. Portfolio occupancy rose 0.3ppt q-o-q to 92% despite a slower than expected return to office and market volatility.

Lower DPU Forecast for KORE by 8- 10%

  • We lower our FY22-24F DPU forecast for Keppel Pacific Oak US REIT 8-10% by changing fees to be fully paid in cash.
  • Based on our proprietary ESG model, Keppel Pacific Oak US REIT has a score 3.0 (out of 4.0). As this score is in line with country median we apply a 0% premium to our DDM-derived target price.
  • Stay BUY with a revised target price of US$0.87 for Keppel Pacific Oak US REIT from US$0.92, 26% upside and ~9% yield.

Source: RHB Invest Research - 28 Jul 2022

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KepPacOakReitUSD 0.30 -0.005 (1.64%) 2,431,100 

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