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Keppel Pacific Oak US REIT rides on bullish outlook with Dallas acquisition

Stanislaus Jude Chan
Stanislaus Jude Chan9/9/2019 04:45 PM GMT+08  • 4 min read
Keppel Pacific Oak US REIT rides on bullish outlook with Dallas acquisition
SINGAPORE (Sept 9): Fresh from its change in name as it enters into a new outsourcing management agreement, Keppel Pacific Oak US REIT, formerly known as Keppel-KBS US REIT, is expanding into another key growth market in the US.
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SINGAPORE (Sept 9): Fresh from its change in name as it enters into a new outsourcing management agreement, Keppel Pacific Oak US REIT, formerly known as Keppel-KBS US REIT, is expanding into another key growth market in the US.

The new manager announced Sept 6 that KORE is acquiring a freehold office complex in Irving, Dallas, Texas, for US$101.5 million ($140.1 million), extending the REIT’s presence to a total of eight markets.

The proposed acquisition of One Twenty Five, which comprises two Class A office buildings with a net leasable area of 445,317 sqft, is expected to be DPU accretive.

Located at 125 East John Carpenter and 5100 North O’Connor, the office complex sits in a key economic hub of North Central Texas, which has one of the highest concentrations of corporate headquarters in the US.

The acquisition is expected to be completed in 4Q19. Upon completion, the pro-forma DPU to unitholders would have grown by 1.0% from 6.22 US cents to 6.28 US cents.

At the same time, KORE’s net leasable area will increase by 10.5% to over 4.7 million sqft of quality office spaces, with an improved portfolio committed occupancy rate of 94.2%.

Assets under management will also expand by 9.3% to approximately US$1.2 billion.

The manager intends to finance the acquisition with the proceeds from a private placement to institutional and other investors as well as debt financing and internal cash resources.

The proportion of the debt and equity to be employed to fund the acquisition will be determined at a later date, taking into account the then-prevailing market conditions.

Market watchers are bullish about the proposed acquisition, which improves KORE’s tenant diversity and defensiveness.

“We believe that the new tenant exposure adds diversity and defensiveness to the overall portfolio, reducing its reliance on any tenant or industry,” says DBS Group Research lead analyst Derek Tan in a flash note on Monday.

“Supported by young, affluent and well-educated population and low unemployment rates, we believe that the property is located in a fundamentally strong market,” he adds. “Quality micro market dynamics points to stronger prospects in the long term.”

DBS is keeping its “buy” call on KORE with an unchanged target price of 75 US cents, pending completion of the deal.

Meanwhile, RHB Group Research is also maintaining its “buy” recommendation, and keeping its target price unchanged at 88 US cents.

“One of the key highlights of the asset is its long WALE of 7.1 years – the highest among all its assets and nearly double its current portfolio average WALE of 3.8 years,” says RHB analyst Vijay Natarajan.

Calling it a “good complementary acquisition,” Natarajan adds that he is raising FY19-21F DPU estimates marginally by up to 1%, after factoring in the acquisition and associated equity fundraising.

“Overall, besides an organic growth via rent escalations, we also see room for a healthy rent growth from its under-rented assets,” the analyst says. “Valuations are undemanding at 0.9x P/BV, and a close to 8% yield with a healthy more than 300bps spread, when compared to multiples of Singapore Office REITs.”

Further, DBS’s Tan says the name change and branding signify a parting with the former KBS brand, but notes that the proposed transaction underscores KORE’s ability to still tap on its sponsor despite name change.

“We understand that there is no change to the current arrangement where KORE will continue to have the first look at – or right of first refusal – on any potential asset divestment by KBS Strategic Opportunities REIT I&II,” Tan says.

As at 4.36pm, units in KORE are trading flat at 75 US cents. According to DBS valuations, this implies an estimated PE of 14.2 times and a distribution yield of 8.5% for FY20F.

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