Keppel Pacific Oak US REIT - DBS Research 2022-10-27: A Calm Quarter

• See Keppel Pacific Oak US REIT's announcement dated 26 Oct 2022 for its 3Q22 business update:
  • 3Q22 estimated DPU fell marginally by 2.1% y-o-y to US$0.014, mainly due to the divestment of Northridge Centre.
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  • In Jul 22, Keppel Pacific Oak US REIT entered into a new loan facility of US$180m for an early refinancing of its borrowings due in Nov 23 and Jan 24 totaling US$130m. Post this refinancing, there will be no refinancing requirement until Nov 24.
  • While interest rates have risen sharply in the US, Keppel Pacific Oak US REIT’s debt is largely hedged (~77%). In addition, the loan swap that was recently refinanced will only be expiring in Nov 23. As such, there is minimal refinancing interest rate risk in the near term.

Overall occupancy was relatively stable; US office market remains volatile, but management does not expect portfolio occupancy to fall significantly.

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• 3Q22 continues to record strong reversions at +5.3% vs +4.5% in 2Q22 (excluding a temporary lease that was signed at double-digit negative reversions). 9M22 reversions at 2.9%. Strong reversions mainly came from strong markets in Seattle (The Plaza and The Westpark) and Houston (from Bellaire Park) with reversions ranging from 10% to more than 20% but were offset by properties with negative reversions such as 1800 Westloop.
• Leasing momentum has been relatively stable with ~195k sqft of leases completed in 3Q22.
• Physical occupancy at Keppel Pacific Oak US REIT’s portfolio is close to 60%, higher than the market average of 49%. Markets such as Austin and The Westpark asset have high physical occupancy at above 90%, while The Plaza has been recording ~20% physical occupancy.
• Despite the numbers looking more stable this quarter, management expects the office market to remain volatile possibly until end-2023, as US companies continue to rationalise and right-size their office space as previously long leases come due. The percentage of downsizing varies, ranging from 20% to as high as 100%.
• While Keppel Pacific Oak US REIT’s tenants may also see some return of space, management does not expect it to be significant and believes occupancy can remain at above 90%. However, the situation remains dynamic in the midst of the uncertain macroeconomic outlook.
• Management sees little changes in tenant incentives and expects reversions to remain at a positive mid-single digit rate.
• Subleasing has increased in the US office market overall. However, Keppel Pacific Oak US REIT’s portfolio does not have significant subleasing for now.

Keppel Pacific Oak US REIT - Valuation & Recommendation

• Read more at SGinvestors.io.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-10-27 SGinvestors.io

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