- Keppel Pacific Oak US REIT's adjusted distributable income dropped 12.5% y-o-y in 1Q23 due to higher interest rates. Portfolio occupancy eased 0.7ppt q-o-q to 91.9%. Excluding Spectrum, rental reversion was positive at 4.9%.
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- Keppel Pacific Oak US REIT's share price trades at an attractive 2023 distribution yield of 13.8% and P/NAV of 0.45x (55% discount to NAV). Maintain BUY.
Keppel Pacific Oak US REIT's 1Q23 RESLTS
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- Keppel Pacific Oak US REIT changed its policy to pay 100% of management fees in cash starting 2Q22, instead of the previous policy of paying 100% of management fees in units. Assuming that management fees for 1Q22 were also paid in cash, 1Q23 distributable income would have declined by a smaller 12.5% y-o-y.
- Continued growth from magnet cities. Gross revenue increased marginally by 0.2% in 1Q23 despite the divestment of Northbridge Center I & II (completed on 28 Jul 22) and Powers Ferry (completed on 22 Dec 22) in Atlanta.
- Catering to expansion by key tenant Spectrum. Keppel Pacific Oak US REIT weathered negative rental reversion of 6.5% for 218,897sf of office leases signed in 1Q23. The negative reversion was skewed by renewal and expansion by Spectrum at Maitland Promenade in Orlando where asking rents were significantly below in-place rent. Spectrum has doubled its floor space to 101,000sf.
- Excluding Spectrum’s new lease, Keppel Pacific Oak US REIT clocked positive rental reversion of 4.9%. New leasing demand and expansions were derived from technology, advertising, media and information (TAMI) (59.5%) and professional services (24.3%). On a portfolio basis, in-place passing rents remain 2.1% below asking rents. Keppel Pacific Oak US REIT continues to benefit from built-in annual rental escalation of 2.4% across its portfolio.
- Slight erosion of portfolio occupancy. Keppel Pacific Oak US REIT's portfolio occupancy eased 0.7ppt q-o-q to 91.9% as of Mar 23. Occupancy for Seattle - Bellevue/Redmond remains high (The Plaza Building: 90.3%, Bellevue Technology Center: 95.1% and Westpark Portfolio: 97.2%). Occupancy for 105 Edgeview dropped 5.4ppt q-o-q to 94.6% due to non-renewal by a technology tenant (10,000sf). Occupancy for Bellaire Park declined 7.3ppt q-o-q to 88.4% due to non-renewal by a healthcare tenant (20,000sf).
- Resilient balance sheet. Aggregate leverage was stable at 38.7% as of Mar 23 and well within regulatory limit of 50%. All-in average cost of debt increased 103bp y-o-y to 3.96% in 1Q23 due to rising interest rates. About 78% of Keppel Pacific Oak US REIT’s borrowings are hedged to fixed rates. Interest coverage is healthy at 3.6x.
- Benefitting from 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 its revolving credit facility. Weighted average term to maturity is a healthy 3.4 years.
- Keppel Pacific Oak US REIT has no refinancing requirements until Nov 24.
Rents at magnet cities registering faster pace of growth.
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Above is the excerpt from report by UOB Kay Hian Research.
Clients of UOB Kay Hian may be the first to access the full report in PDF @ https://www.utrade.com.sg/.
Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-04-19 SGinvestors.io
Read also UOB's most recent report:
2023-10-20 Keppel Pacific Oak US REIT - Outperforming Through Higher Portfolio Occupancy In 3Q23.
Previous report by UOB:
2023-07-28 Keppel Pacific Oak US REIT 1H23 - Differentiated By Focus On Growth Cities.
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