Keppel Pacific Oak US REIT Analysis @ 22 October 2020

Basic Profile & Key Statistics

Keppel Pacific Oak US REIT (KORE) is a pure office REIT that owns 13 properties in U.S. KORE is traded in USD.

Quarter Performance Review

Gross revenue and net property increased by 13.5% YoY and 10.8% YoY respectively. The increase is mainly due to the acquisition of One Twenty Five property in Nov 2019. However, income available for distribution increased higher by 18.5% YoY, this indicates that KORE manages its expenses better than last year in the same quarter. Assuming US$ 14.7 mils to be fully distributed, DPU would be 1.56 cents, increased by 4% YoY from 1.5 cents. Side note, distribution margin is one of the metrics to know how well management could manage its expenses. Later from the trend below, you could see that 3Q 2019 is at 40.8% and 3Q 2020 is at 42.6%.

Lease Profile

Occupancy dropped to 92.8%. WALE is moderate at 4 years where the highest lease expiry of 42.8% falls in 2025 and beyond, without breakdown. All of KORE properties are freehold. 

Debt Profile

Gearing ratio is moderate at 37.7%. Cost of debt is high at 3.4% with 100% unsecured debt. Fixed rate debt is slightly high at 85.6%. Interest cover ratio is high at 4.5 times. WADE is slightly long at 3.1 years where the highest debt maturity of 28.9% falls in the year 2022. 

Diversification Profile

KORE is diversified in which its top geographical, top property, top tenant and top 10 tenants contribution are all low at 42.4%, 18.7%, 3.5% and 19.5% respectively.

Key Financial Metrics

Property yield and distribution on capital is high at 5.5% and 3.4% respectively. Management fee is competitive in which unitholders receive US$ 10 for every dollar paid to the manager. Distribution margin is low at 41.4%.

Trends

DPU is on an uptrend, latest quarter DPU of 1.56 is based on assumption that KORE would distribute all of its distributable income. Note that the actual 1Q 2018 DPU is 2.32 for the period between 9 November 2017 to 31 March 2018, for a fair comparison, I have annualized it to 3 months period to around 1.46. NAV per unit and interest cover ratio are on a downtrend. However, if we only look at the post rights issue on 4Q 2018, NAV per unit maintains more or less the same. Property yield and distribution margin are flat. 

Relative Valuation

i) Average Dividend Yield  - Average yield at 8.18%, apply the past 4 quarters DPU of 6.17 cents (assume all distributable income is distributed) will get US$ 0.755. 

ii) Average Price/NAV - Average value at 0.90, apply the latest NAV of US$ 0.802 will get US$ 0.72.

Author's Opinion

Favorable	Less Favorable
100% Freehold Properties	High Cost of Debt
100% Unsecured Debt	Low Distribution Margin
High Interest Cover Ratio	Interest Cover Ratio Downtrend
Top Geographical Contribution
Top Property Contribution
Top Tenant & Top 10 Tenants Contributions
High Property Yield
Competitive Management Fees
High Distribution on Capital
DPU Uptrend

KORE fundamental remains sound and not affected by COVID-19. This quarter performance is improved YoY but similar to last quarter. Though there are some notable changes, which are:

1) WADE which is extended from 2.5 years to 3.1 years due to early refinancing of loan which would expire in 2021.

2) Occupancy has dropped from 94.3% to 92.8%, and there is another 1.6% lease expiry by NLA this year. 

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*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee accuracy, completeness, and reliability. It should not be taken as financial advice or a statement of fact. I shall not be held liable for errors, omissions as well as loss, or damage as a result of the use of the material in this blog. Under no circumstances does the information presented on this blog represent a buy, sell, or hold recommendation on any security, please always do your own due diligence before any decision is made.