Keppel Pacific Oak US REIT - UOB Kay Hian 2023-02-13: 2H22 Head & Shoulders Above Peers

• Keppel Pacific Oak US REIT's 2H22 DPU dropped 12.6% y-o-y to US$0.0278. Adjusting for the change in policy to pay 100% of management fees in cash, 2H22 DPU would have declined by a smaller 2.8% y-o-y.
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• Keppel Pacific Oak US REIT's share price trades at an attractive 2023 distribution yield of 9.9% and P/NAV of 0.64x (36% discount to NAV). Maintain BUY. Target Price: US$0.71.

Keppel Pacific Oak US REIT (KORE)'s 2H22 Results

• Keppel Pacific Oak US REIT (SGX:CMOU) reported 2H22 distributable income of US$29.0m (-10.6% y-o-y) and DPU of US$0.0278 (-12.6% y-o-y), which is in line with our expectations – See Keppel Pacific Oak US REIT's announcement dated 01 Feb 2023.
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• Continued growth from magnet cities. Gross revenue increased 1.4% in 2H22 with growth from the acquisition of Bridge Crossing in Nashville and 105 Edgeview in Denver (completed on 20 Aug 21), partially offset by the divestment of Northbridge Center I & II (completed on 28 Jul 22) and Powers Ferry (completed on 22 Dec 22) in Atlanta.
• Organic growth from positive reversion and rental escalation. Keppel Pacific Oak US REIT achieved positive rental reversion of 8.1% for 4Q22 driven by firmer rents in the technology hubs of Seattle - Bellevue/Redmond. New leasing demand and expansions were derived from technology, advertising, media & information (TAMI), professional services and finance & insurance. In-place passing rents are 6.1% below asking rents, underpinning organic growth from sustained positive rent reversion. Keppel Pacific Oak US REIT benefits from built-in annual rental escalation of 2.4% across its portfolio.
• Portfolio occupancy stable 92.6% as of Dec 22. Keppel Pacific Oak US REIT saw higher occupancies for Bellevue Technology Center (+1.8ppt q-o-q to 96.8%) and Westpark Portfolio (+1.1ppt q-o-q to Bellevue/Redmond, offset by lower occupancy for Iron Point in Sacramento (-10.5ppt q-o-q to 78.3%).
• In-migration supports capital values. Portfolio valuation improved by 0.2% or US$2.2m y-o-y. Capitalisation rates were mostly stable. Keppel Pacific Oak US REIT recognised fair value loss of US$39.2m after factoring in capex and tenant improvements for 2022. NAV per unit was stable at US$0.81.
• Demonstrating foresight with early refinancing. Keppel Pacific Oak US REIT secured a new loan facility of US$180m in Sep 22, which was utilised to refinance borrowings of US$130m due in Nov 23 and Jan 24 and partially repay outstanding revolving credit facility. Weighted average term to maturity is a healthy 3.6 years. It has no refinancing requirements until Nov 24.
• Resilient balance sheet. Aggregate leverage was stable at 38.2% as of Dec 22 and well within regulatory limit of 50%. All-in cost of debt was 3.2% in 2022, compared with 2.8% for 2021. 78% of Keppel Pacific Oak US REIT’s borrowings are hedged to fixed rates.

Rents at magnet cities registering faster pace of growth.

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Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-02-13 SGinvestors.io

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