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Catch the next leg of US office market upturn with Keppel-KBS US REIT

PC Lee
PC Lee1/15/2018 11:09 AM GMT+08  • 2 min read
Catch the next leg of US office market upturn with Keppel-KBS US REIT
SINGAPORE (Jan 15): DBS Group Research is initiating coverage on Keppel-KBS US REIT with a "buy" call and target price of US 95 cents.
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SINGAPORE (Jan 15): DBS Group Research is initiating coverage on Keppel-KBS US REIT with a "buy" call and target price of US 95 cents.

The initial portfolio of 11 freehold office assets are located in seven US key regional markets which are seeing positive dynamics, says DBS.

The properties 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.

"We believe Keppel-KBS US REIT offers investors the opportunity to catch the next leg of the US office market upturn," says analyst Mervin Song in a Monday report.

DBS expects Keppel-KBS US REIT's DPU to grow by 6% over FY18 and FY19. The robust outlook is underpinned by an under-rented portfolio where average expiring rents for the initial portfolio in 2018 and 2019 are 23.5% and 26.0% below the current average market rent.

But with 34% of leases by cash rental income due to expire in FY18 and FY19, Keppel-KBS US REIT is well placed to capture the expected upturn in market rents. Moreover, 97.5% of its leases have in-built rental escalations of 2-3% per annum, says Song.

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More importantly, Keppel-KBS US REIT is backed by reputable sponsors.

These are Keppel Capital, the asset management arm of Keppel Corporation, and KBS, the premier US investment manager which is 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," says Song.

Units in Keppel-KBS US REIT are trading at US 90 cents or 6.6% distribution yield for FY18.

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