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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 10 Oct 2019, 9:26 AM

 

Keppel Pacific Oak US REIT - A Good Complementary Acquisition

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  • Maintain BUY and unchanged USD0.88 Target Price, 17% upside plus 8% yield.
  • The acquisition of One Twenty Five (OTF) by KEPPEL PACIFIC OAK US REIT (SGX:CMOU) is a good complementary fit to its portfolio in our view as a long WALE and quality tenant base offer longer-term stability.
  • Overall, besides an organic growth via rent escalations, we also see room for a healthy rent growth from its under-rented assets.
  • Keppel Pacific Oak US REIT's valuations are undemanding at 0.9x P/BV, and a 8% yield with a healthy > 300bps spread, when compared to multiples of Singapore Office REITs.

One Twenty Five (OTF) Ticks All the Right Boxes

  • The freehold asset acquired from sponsor comprises two office buildings which have undergone extensive refurbishments recently, with minimal additional capex expected in the near-term. The purchase price of USD101.5m, is at a 1% discount to the average price established by two independent valuations.
  • The assets’ NPI yield of 7% is at the higher-end of its portfolio, with a good committed occupancy of 95.5%. With a current in-place rent of USD25.7 psf, 11% below market average, we see good room for rent growth. In addition, the leases have a built-in average rent escalation of 2.5% pa.
  • Market outlook remains positive on the back of limited supply and healthy demand with Cushman & Wakefield (Cushman) expecting rents to grow at 1.5% pa over the next 5 years. The proposed acquisition is subject to unitholders’ approval at the EGM and is expected to be completed by the end of 3Q19.

Long WALE and Quality Tenant Base Provide Diversification and Offer Stability

  • One of the key highlights of the asset is its long WALE of 7.1 years, the highest among all its assets and nearly double is current portfolio average WALE of 3.8 years. This, in our view, offers rent stability and downside protection, especially in the current volatile market.
  • The property also provides a mix of good quality tenants (20) mainly in the professional services, government administration, and medical services sector with the top five tenants accounting for 55% of total cash rental income.
  • Only 2% of the leases are expiring by 2020, with the bulk of 78% of leases expiring after 2023.

DPU Accretive Deal

  • Keppel Pacific Oak US REIT plans to fund the acquisition via a combination of equity (private placement) and debt. Currently, the manager has assumed the asset to be financed 67% by equity and the rest by debt (assumed debt cost of c.3.2%), which results in a pro-forma (FY 2018) DPU accretion of 1%.
  • Gearing is expected to come down slightly from the current levels (37.7%) post transaction as it’s expected to be majority funded by equity.

DPU Adjustments

  • Our FY19-21F DPU is adjusted marginally by 0-1% factoring in the acquisition and associated equity fundraising.

Source: RHB Invest Research - 9 Sep 2019

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