• Keppel Pacific Oak US REIT (SGX:CMOU) 3Q19 results in line with expectations.
• Positive leasing momentum; reversions up 13.4% YTD.
• Key cities of Seattle, Austin and Denver seeing strong absorption.
• Awaiting positive contribution from proposed acquisition of One Twenty Five in Dallas.

Boost From Recent Acquisitions; 9M19 DPU in Line

• KEPPEL PACIFIC OAK US REIT (SGX:CMOU) reported 3Q19 DPU of 1.50 UScts, which was 5.1% lower compared to our projection but flat on a q-o-q basis. YTD DPU was 4.5Scts (which rose 31.2% y-o-y after applying the rights adjustment factor to 9M19 DPU. Overall results were in line with our expectations with DPU forming 74% of our full-year forecast. See Keppel Pacific Oak US REIT's announcements.
• The improved performance over the quarter was underpinned by 34.0% and 36.2% y-o-y growth in revenue and NPI respectively. Keppel Pacific Oak US REIT’s performance benefitted from the recent acquisition of Westpark Portfolio, Seattle in November 2018, and Maitland Promenade I in Orlando in January 2019. Occupancy was stable while rental reversion was positive in 9M19 (+13.4%, increased momentum compared to 8.6% in 1H19).
• Overall portfolio committed occupancy held up at 93.8% (vs 94.0% in 2Q19). Building on the positive take-up in prior quarters, The Plaza’s occupancy inched higher to 98.6%, while Bellevue Tech Center’s occupancy dipped marginally to 97.3% in 3Q19. Furthermore, occupancy at Westmoor Center (one of Keppel Pacific Oak US REIT’s key properties) continues to inch higher to 97.4% (vs 91.2% in 2Q19, 83.7% in 1Q19). Other notable increases were Westech 360 (Austin) and Great Hills (Austin) which saw occupancy increasing to 98.5% and 100% respectively. However, occupancy rate at 1800 West Loop dipped to 77.1% in 3Q19 (vs 81.9% in 2Q19), due to a tenant vacating the space (which was already on a monthly renewal).

Rental Reversion Momentum Accelerated in 3QFY19

• During 3Q19, Keppel Pacific Oak US REIT leased a total of 232k sqft of space with positive rental reversions of 13.4% YTD (vs 8.6% in 1H19), which we understand was largely from its Seattle properties which continue to see strong absorption trends.
• With 14.3% of the portfolio’s NLA renewed in 9M19, income is fairly secured for the year given that only 2.3% of its NLA is left to be negotiated for the rest of the year. In FY20 and FY21, another 11.8% and 14.8% of leases are set to expire, respectively.

Stable Gearing; Potential Fund Raising for the Purchase for One Twenty Five in Dallas

• As at end-Sep 2019, Keppel Pacific Oak US REIT’s gearing was relatively stable at 38.5% with all-in average cost of debt at 3.74%. The proportion of borrowings on fixed rates remains high at 83%.
• Keppel Pacific Oak US REIT does not face any significant refinancing until FY21 when 33% of debt is due.
• NAV per unit stood at US$0.79.

Positive Momentum to Continue

• On the back of continued positive net absorption, in general Keppel Pacific Oak US REIT’s key markets should see 3-10% increase in rents in the coming 12 months, according to Co-Star, a US property consultant. This is a continuation of 1%-10% rental growth that the various markets had seen in the previous months.
• Meanwhile, rentals at Keppel Pacific Oak US REIT core markets in Seattle, Austin and Denver (which represent 60% of the portfolio by gross income) are projected to grow at a faster 5-10% as these cities are seeing strong demand from the technology sector. Beyond the expansion of Amazon and Microsoft whose headquarters are located there, Seattle is also becoming the choice location for other tech giants such as Google, Apple and Facebook. In addition, these technology companies are flocking to suburban neighbourhoods where Keppel Pacific Oak US REIT’s properties are located. Meanwhile, Keppel Pacific Oak US REIT’s Austin properties are expected to benefit from the opening of a new Apple camp.
• Thus, we expect Keppel Pacific Oak US REIT to continue reporting positive rental reversions over the next few quarters.

Maintain BUY, Target Price of US$0.90

• With Keppel Pacific Oak US REIT’s 3Q19 results in line with expectations, we maintain our BUY call with a Target Price of US$0.90 based on DCF. See Keppel Pacific Oak US REIT's share price; Keppel Pacific Oak US REIT's dividend history.
• Our favourable view on Keppel Pacific Oak US REIT is premised on its large exposure to the Seattle, Austin and Denver markets which are benefitting from the growth in the technology sector and are seeing rising rents.
• With the proposed acquisition of One Twenty Five in Dallas and accompanying fund raising exercise, we anticipate the proposed deal (funded by 65% equity and 35% debt) to be accretive to distributions. Our forecast has yet to factor in this deal.

Source: DBS Research - 16 Oct 2019