Keppel Pacific Oak REIT (SGX:CMOU)'s 8.5% Yield Supported By Healthy Performance


Image Source: Keppel Pacific Oak REIT's Website


Keppel Pacific Oak REIT (SGX:CMOU)'s second-quarter DPU was up 4% to 1.56¢. It is currently trading at 8.5% yield based on the last traded share price of $0.725 on 19 Aug.


Key Highlights:


  • Distribution per unit (DPU) and Dividend Yield (8.5%)

  • Price to book ratio (0.88)

  • Gearing (37.4%)

  • Interest coverage ratio (4.4x)

  • Portfolio occupancy rate (94.3%)

  • Growth catalyst


Background of Keppel Pacific Oak REIT


Keppel Pacific Oak REIT was formerly known as Keppel-KBS US REIT, is a REIT that owns freehold commercial assets in the US. The REIT manages 13 freehold office buildings in its portfolio. Keppel Pacific Oak REIT is managed by Keppel Pacific Oak US REIT Management Pte Ltd, which is jointly owned by two sponsors, Keppel Capital owned by Keppel Corporation Limited (SGX: BN4) and KPA.


1. Distribution per unit and dividend yield


In its second quarter 2020 result, Keppel Pacific Oak REIT continues to deliver a healthy operational performance, with a 4% increase in DPU on an enlarged unit base of 13.8%. Its net property income was up 16.3% to US$20.9m. This was mainly due to the contributions from the new asset, One Twenty Five and positive rental reversion last year. Based on its latest price, the REIT is currently trading at about 8.5% dividend yield.



2. Price to book ratio


The REIT is currently trading at a price to book ratio of 0.9, which is slightly above its 3-year average of 0.88. However, the current valuation still indicates a 10% discount on its net asset value.


3. Gearing


Portfolio leverage increased to 37.4%. The average debt tenor maintained at 2.5 years. The REIT will have no refinancing required until Q4 2021.


4. Interest coverage ratio


The REIT has a healthy interest coverage ratio of 4.4 times, which is slightly above our preference of 4 times. Besides, the REIT's overall interest cost dropped to 3.34%, with 84.3% of its debt is hedged under fixed rate. The REIT is sensitive to the LIBOR rate, an increase of 50bps on the LIBOR rate will have a negative impact of 0.06 US cents on its DPU.


5. Portfolio occupancy rate


Portfolio occupancy remains at a high occupancy rate of 94.3%. The REIT has built a resilient portfolio with a focus on key growth area in US. Its 13 commercial buildings and business campuses are all freehold.

Keppel Pacific Oak REIT's Occupancy Rate

6. Growth Catalyst


The management has projected a rental contraction of 2.5%-8.4% in the next 12 months across its key markets due to the Covid-19 pandemic. However, its suburban office buildings are expected to outperform and benefit from the shift away from central locations as businesses re-evaluate their spacing needs post Covid-19.


Besides, the REIT portfolio is strategically positioned to tap on the fast expanding tech hubs, which provides further income resilience as businesses accelerate their digital transformation. It has limited exposure on the retail segment which is highly impacted by the pandemic.


Summary


Keppel Pacific Oak REIT has been delivering very healthy financial metrics since its IPO 3 years ago. Its current valuations are quite decent based on its last traded price. We will continue to watch its performance closely during this uncertain period.



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