SINGAPORE (Sept 25): DBS is maintaining its “buy” call on Keppel-KBS US REIT with a target price of 95 US cents.
This came on the back of news that the REIT will be acquiring 21 buildings – dubbed the Westpark portfolio – located in a suburban business campus in Redmond, Washington for US$169.4 million ($231.4 million) from KBS Strategic Opportunity REIT (SOR).
See: Keppel-KBS US REIT acquiring Redmond, Washington portfolio for US$169 mil
In a Tuesday report, analyst Mervin Song says, “The acquisition price translates into an initial NPI yield of 6.80-6.85%.”
The Westpark Portfolio has a total net lettable area of 781,966 sq ft with a current committed occupancy of 97.7%. The weighted average lease expiry (WALE) stands at 4.3 years with the top 10 largest tenants having a WALE of 5.3 years.
In the near term, 7.2%, 12.0% and 17.9% of leases by cash rental income (CRI) are due to expire in 2018, 2019 and 2020 respectively. All leases at the property have inbuilt rental escalations of between 2% and 3% per annum.
The portfolio had undergone extensive capital improvements since KBS SOR’s acquisition of it in Feb 2016. This has resulted in increased demand from the technology and professional services sector.
“We understand in place rents are 8-10% below market rents, which presents potential positive rental reversions going forward,” says Song.
Although this transaction is yield accretive, the analyst reckons that investors may remain cautious on this transaction should the REIT undertake a rights issue given the expected decrease in absolute DPU.
Nonetheless, this would be offset by the Westpark Portfolio being under renter, which h provides for healthy rental reversions going forward and enhances the REIT’s visible organic growth profile.
Furthermore, the REIT may need to address concerns regarding the increased concentration risk to a single market, in the medium term. The analyst is however positive on the REIT’s deepening presence in Seattle given the favourable demand/supply dynamics and expectations of rising market rents over the next few year.
As at 11.05am, units in Keppel-KBS US REIT are trading at 78 cents or 15.3 times FY19 earnings with a distribution yield of 8.1%.
