• Keep BUY, USD0.88 Target Price, 9% upside. 2Q19/1H19 results are in line, at 25%/50% of our full-year estimates.
• Key positive takeaways (2Q) are: strong occupancy rate improvement and healthy positive rental reversions, driven by the technology and related services sectors.
• We maintain that Keppel-KBS US REIT is still undervalued, with a FY19F yield of 7.6%, and a solid 250bps spread over office S-REITs. We are hosting an investor meeting with management tomorrow, and will publish a detailed note after that.

Adjusted 2Q DPU Beats Forecast by 2%

• Keppel-KBS US REIT (SGX:CMOU)’s 2Q19 revenue and NPI grew 29% and 30% y-o-y, driven by contributions from recently-acquired The Westpark Portfolio, Maitland Promenade I and a higher occupancy rate for its existing properties. Finance costs surged 59% y-o-y on higher borrowings taken to fund acquisitions.
• Overall adjusted DPU (restated for rights issue) for the quarter rose 7.1% y-o-y, at 2% more than what was forecasted in its IPO prospectus.

Healthy Portfolio Occupancy Rate Improvement in 2Q

• Keppel-KBS US REIT’s committed more than estimated q-o-q to 94%, underpinned US.
• In 1H19, Keppel-KBS US REIT leased a total of ~376,000 sqf of office space – this accounted for 8.8% of total NLA, with more than half being lease renewals. More than two-thirds of lease renewals came from the fast-growing technology hubs of Seattle, Austin and Denver, which reaffirms our earlier thesis of booming technology sector office demand.

Positive Rental Reversion of 8.6% Was Achieved for the Leases Signed in 1H19

• The trend is expected to rents (2019- 2021) ranging USD 15% below the weighted average asking rental rate of USD26 psf. In addition, Keppel-KBS US REIT’s leases have an average inbuilt annual rental escalation of 3%, driving organic DPU growth.

Source: RHB Invest Research - 17 Jul 2019