SINGAPORE (Jan 28): DBS Vickers Securities is maintaining its “buy” call on Keppel-KBS US REIT (KORE), with a higher target price of 80 US cents from 78 US cents previously to adjust for lower-than-expected debt balance at end-FY18.
See: Keppel-KBS US REIT posts 4Q DPU of 1.25 US cents, 16.7% lower than forecast on enlarged base
In the research house’s view, concerns over its depressed unit price have now been priced in considering how the REIT, at 68 US cents per unit, trades at about 9% forward yield or 15% to book value.
This comes at a time when rents are in the midst of an upswing whilst favourable provisional tax regulations are being introduced in December, says analyst Mervyn Song in a Monday report.
In particular, Song believes KORE continues to offer investors an opportunity to catch the next leg of the US office market upturn.
“KORE’s 13 freehold office assets are located in seven key regional markets in the US which are seeing positive dynamics. These markets 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,” notes the analyst.
The way Song sees it, KORE’s demonstration of value created from its recent acquisitions should allay investor concerns over the trust’s unit price correction in 2018.
“Going into 2019, we expect DPU to jump 14% y-o-y, owing to the upturn in spot rents; prior quarters of rental reversions; the inbuilt 2-3% annual rental escalations; and full impact of the recent acquisition of Westpark portfolio and Maitland Promenade I (completed on 17 January 2019),” says Song.
Further, with strong positive rental reversions over 4Q18, 10-15% below-market passing rents and 11.7-15.6% of leases by cash rental up for renewal in FY19-FY20, the analyst believes KORE is now well-placed to capture the upturn in spot rents and drive rental income higher.
“We remain bullish on KORE given expectations of a 14% y-o-y jump in CY19 DPU and its attractive valuations. Currently, KORE offers an 8.8% forward yield and trades at a c.15% discount to book. We believe KORE does not deserve to trade at a discount to book as the markets in which its properties are located are on an upturn,” concludes the analyst.
As at 3:51pm, units in KORE are trading 0.74% higher at 68 US cents or 13.9 times FY19F P/E.
