Is Keppel Pacific Oak US REIT's 7.9% Yield Compelling?



Key Highlights:

  • Keppel Pacific Oak US REIT (SGX: CMOU) has announced a flat 3Q19 DPU of US1.5¢

  • The tech sector drives double-digit rental reversion



1. Flat DPUs on top of increasing net property income


Net property income went up 36.2% to US$18.5m, driven by the newly acquired The Westpark Portfolio and Maitland Promenade I. However, the distribution per unit (DPU) remains flat due to the share dilution by a 31% enlarged share base after the exercise of right issues recently. The current dividend yield is 7.9%.


The leasing momentum remains strong, mainly boosted by the tech and professional service sectors. The rental reversion was pushed up 13% year-till-date, with a stable occupancy rate of 93.8%.



2. Debt financing remains stable


Aggregate leverage went up slightly to 38.5%. The average interest cost remains steady at 3.74%. The downside risk is limited, with 82.7% of debt are on fixed rates.



3. Growth catalyst


With the recovery of US economy, Keppel Pacific Oak US REIT will continue to enjoy strong leasing momentum and rental reversion. The unemployment rate last quarter was the lowest in the past 50 years and the office vacancy rate also fell to a decade-low of 9.7%. The tech sector continued to be a significant driver of office rent growth.


Besides organic portfolio growth through asset acquisition, the management of the Keppel Pacific Oak US REIT will continue to exercise prudent capital management to deliver stable distributions. Its recent acquisition of One Twenty Five office complex in Dallas will be DPU accretive.



Summary


With a portfolio of US assets, Keppel Pacific Oak US REIT is one of the beneficiaries on the recovery of the US economy and the booming of the tech sector. The stock price has been quite volatile since its IPO in 2017. While the fundamental is attractive, with growth catalysts moving forward, we prefer to put Keppel Pacific Oak US REIT under the watchlist until the price is stabilised.



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