September 6, 2019

Despite concerns over the rising US China trade tensions, we believe KORE’s office portfolio, which mainly focuses on US technology hubs, will stay resilient and continue to outperform the broader market. The changes announced in name and trust structure are more cosmetic in nature, and should not have any operational impact. Valuations are attractive at 0.9x P/BV and 8.3% yield – healthy at >300bps spread compared to Singapore Office REITs.

Keppel-KBS US REIT announced a change of name to Keppel Pacific Oak US REIT (KORE), with plans underway to enter into a new outsourcing management agreement with a new US asset manager, Pacific Oak Capital Advisors LLC. The new outsourcing management agreement will be substantially on the same terms as the existing one. No operational impact is expected as the asset manager (the Core Plus team), and the REIT’s management team are expected to remain the same, post changes. In our view, the impending reorganisation will help investors draw a clear distinction between KORE and its peer, Prime US REIT (PRIME SP, NR). KORE will also continue to have the “first-look opportunity” over assets in the Strategic Opportunity Series for acquisitions.

Portfolio average rent of leases expiring in 2019-2021 are in the USD22-22.50 range, c.15% below the weighted average asking rents of USD26 psf. About 35% of portfolio leases by cash rental income (CRI) are due for renewal up until 2021, for which we expect mid- to high-single digit rental reversion. In addition, the leases have an in-built rent escalation of ~3% pa.

Management has guided for potential c.USD100m in acquisitions later this year, depending on market conditions. Potential target locations include sub markets of key growth cities like Austin, Denver, Salt Lake City, Charlotte, and North Carolina, where office capitalisation rates (6-7%) are still attractive. With a limited debt headroom, we expect funding to be via a combination of debt and equity (placement/preferential offerings).

There has been a slight delay in the finalisation of the proposed US tax regulations (announced in Dec 2018) that were expected to be completed by Jul 2019. The regulations, when finalised (under the current form), should be positive to the REIT as it should help in additional tax savings of ~2% (which is the tax paid in the Barbados entity). Management noted that such tax structure changes will incur a minimal one–off cost (<USD 1 m) and can be completed within 1-2 months upon finalisation. Maintain BUY and USD0.88 TP, 19% upside plus c.8% yield. -RHB

Keppel Pacific Oak US REIT US$0.74