• Committed occupancy continues to climb, hitting 90.3%, above earlier guidance of 87.8% for full year
• 5% positive rental reversion achieved in 2Q18 with spot rents still on an upturn. Read More
Catch the next wave. We maintain our BUY call and TP of US$0.95 for Keppel-KBS US REIT (KORE). The stock offers investors the opportunity to catch the next leg of the US office market upturn. The 11 freehold office assets in the initial portfolio are located in seven key regional markets in the US which are seeing positive dynamics and should also benefit from tenants seeking cheaper rents and the flow of capital as investors pursue markets where asset prices have yet to rally as much as some gateway cities.
Where we differ - Stronger growth profile. Consensus has a modest DPU growth profile which we believe is too conservative, given KORE’s portfolio is generally under-rented, and average expiring rents for the initial portfolio in 2018 and 2019 are 23.5% and 26.0% below the current average market rents. With c.34% of leases by cash rental income due to expire in FY18 and FY19, KORE is also well placed to capture the expected upturn in rents. Moreover, 97.5% of its leases have inbuilt rental escalations of 2-3% per annum.
Backed by reputable Sponsors. KORE’s two Sponsors are Keppel Capital (the asset management arm of Keppel Corporation Limited), and KBS (a premier US investment manager, ranked the eleventh largest US owner of office properties globally). Their proven capability and KBS’s wealth of transactional experience, implies that acquisitions will be a key long-term growth driver.
We maintain our DCF-based TP of US$0.95. This is based on a WACC of 6.6% and terminal growth rate of 2.5%. Key Risks to Our View: The key risk to our view is lower-than-expected rental income, arising from loss of tenants or slower upturn in spot office rents, and changes to tax regulations in the US.
Source : DBS Group Research