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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 5:02 PM

 

Keppel Pacific Oak US REIT - Strong Rental Growth; Maintain BUY

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  • Maintain BUY with USD0.88 Target Price, 17% upside plus 8% yield.
  • KEPPEL PACIFIC OAK US REIT (SGX:CMOU)'s 3Q/9M19 results came in line accounting for 25%/74% of our full-year FY19F DPU. Key positive takeaways (3Q19) were strong positive double digit rent reversions, and continued office leasing momentum. See Keppel Pacific Oak US REIT Announcements.
  • We maintain our view that the stock remains undervalued at 0.9x P/BV with FY19F yields of 8.1%, > 250bps spread over office S-REITs.

Strong Double-digit Rent Reversions in 3Q

  • Leasing momentum continued in 3Q19 with Keppel Pacific Oak US REIT signing ~232,000 sqf of office space (+34% q-o-q, ~5% of portfolio). Rental reversion for the quarter surged to 21% based on our calculations – the bulk of which mainly came from its core tech markets of Seattle and Austin.
  • For 9M19, Keppel Pacific Oak US REIT signed ~608,000 sqf (14% of portfolio) with rent reversions at +13.4%. About 14% of leases (by NLA) are due for renewal by end-2020, for which we expect high single-digit rental growth. New leases (35.4%) and expansions (3.1%) accounted for nearly 40% of the leases, indicating healthy market dynamics.
  • The strong positive rent growth reiterates our investment thesis of Keppel Pacific Oak US REIT’s under-rented portfolio (c.15% below the weighted average asking rents), and favourable demand-supply dynamics in its key tech markets (Seattle, Austin and Denver), which account for ~75% of total portfolio.

Slight Dip in Portfolio Occupancy Due to Planned Vacancies

  • Portfolio committed occupancy dipped slightly to 93.8% (-0.2ppt q-o-q), mainly due to the planned departure of a short-term lease tenant on 1800 Wes Loop South, Texas where occupancy fell 4.8ppts to 77.1%.
  • On the positive side its key assets in Seattle, Austin and Denver saw healthy improvement in occupancies underscoring positive market conditions. Portfolio WALE also rose to 4.1 years from 3.8 years as at 2Q19 on new leases signed.

Acquisition of OTF and Placement to be Completed in 4Q

  • Keppel Pacific Oak US REIT’s proposed acquisition of One Twenty Five (OTF), Dallas and its associated placement exercise were approved by unitholders at yesterday’s EGM. The deal, along with the placement, should be completed by end-4Q19. The acquisition is accretive to pro-forma FY18 DPU (~1%), and the fund raising should also help in lower its gearing to 37.7% from 38.5% currently.
  • See Keppel Pacific Oak US REIT Share Price; Keppel Pacific Oak US REIT Target Price; Keppel Pacific Oak US REIT Analyst Reports; Keppel Pacific Oak US REIT Dividends ; Keppel Pacific Oak US REIT Latest News.

Adjusted 3Q DPU Beats Forecast by 2%

  • Revenue and NPI were higher 26%/32% y-o-y driven by contributions from recently acquired The Westpark Portfolio, Maitland Promenade I, and the higher occupancy for its existing portfolio. Finance costs also rose 59% y-o-y on higher borrowings to fund the acquisitions.
  • Overall adjusted DPU (restated for the rights issue) for the quarter was higher 7.1% y-o-y – 2% more than its IPO forecast.

Source: RHB Invest Research - 16 Oct 2019

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