Keppel Pacific Oak Reit – Rising with organic growth

June 2022

Excerpts from UOB KayHian report

Keppel Pacific Oak US REIT (SGX: CMOU)

  • Keppel Pacific Oak Reit (KORE) benefits from the dispersion of tech jobs to rising star cities, such as Atlanta, Dallas, Denver and Orlando, which account for 34.4% of its AUM.
  • Management guided positive rent reversion at mid-single-digit in 2022 driven by Seattle and Sacramento. The redevelopment of multi-family units atop the car park at The Plaza Buildings will be finalised over the next two quarters.

KORE provides attractive distribution yield of 9.0% for 2022. Maintain BUY. Target price: US$1.07.

Keppel Pacific Oak Reit benefits from in-migration of companies and population to rising star cities

Tech jobs have migrated to rising star cities outside the Silicon Valley. These regional tech hubs are growing at a faster pace. Major tech companies Hewlett Packard, Oracle, Palantir and Tesla have moved their headquarters from California to Texas.

Keppel Pacific Oak US REIT (KORE) has presence in four rising star cities Atlanta, Dallas, Denver and Orlando, which accounted for 34.4% of its AUM.

Decentralisation and dispersion of tech jobs

According to a study by Brookings Institute, technology employment at nine rising star cities, Atlanta, Dallas, Denver, Miami, Orlando, San Diego, Kansas City, St Louis and Salt Lake City, grew at CAGR of 5% between 2015 to 2019.

These rising star cities have increased their share of postings for tech jobs from 14.5% in 2016 to 16.0% in 2021. During the same period, share of traditional hubs, such as Boston, Bay Area, New York and Los Angeles, contracted from 40% to 31%.

Rising star cities have increased vibrancy and gained share in the number of technology start-ups at the expense of San Francisco and San Jose.

Organic growth from positive rent reversion and rental escalation

Management guided positive rent reversion at mid-single-digit in 2022, driven by Seattle (Bellevue/Redmond) and Sacramento. In-place passing rents are 8.9% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion.

In addition, KORE also benefits from built-in average annual rental escalation of 2.4%.

Keppel Pacific Oak Reit locking in higher rents at Bellevue CBD and Redmond

According to CBRE, leasing on the Eastside continues to be dominated by tech companies, which accounted for 40% of new and renewed leases in 1Q22. Vacancy at Bellevue CBD sub-market is low at 4.5%.

86% of the 3.8m sf of office space under construction is pre-committed to tenants, such as Amazon (e-commerce) and Bungie (video game). Vacancy at Redmond sub-market is tight at 3.2% as there is no new construction.

KORE is expected to achieve positive rent reversion for The Plaza Buildings at Bellevue CBD and The Westpark Portfolio at Redmond, which have 6.3% and 13.2% of NLA up for renewal in 2022.

Sacramento helps to retain tech companies within California

Sacramento continues to attract tech companies relocating from the Bay Area. It is a stone’s throw away from Silicon Valley and in close proximity to UC Berkeley and UC Davis.

Vacancy at Folsom sub-market is low at 6.2%. KORE is expected to achieve positive rent reversion for Iron Point at Folsom, which have 35.2% of NLA up for renewal in 2022.

Employees returning to their offices

Sunbelts markets have outperformed gateway cities in workplace occupancy. Texas is leading with Austin, Houston and Dallas registering
workplace occupancy of 62.4%, 56.3% and 51.8% respectively.

VALUATION/RECOMMENDATION

Keppel Pacific Oak Reit growth comes from in-migration and magnet cities. Our target price of US$1.07 is based on DDM (cost of equity: 7.0%, terminal growth: 1.5%).

KORE is unique due to its focus on suburban offices in magnet cities. KORE provides a distribution yield of 9.0% and yield spread of 7.3% for 2022. It trades at P/NAV of 0.86x.

KORE offers brighter growth prospects due to growth from in-migration at Super Sun Belt and 18-hour cities and technology tenants.

Keppel_Pacific_Oak_US_Reit
Keppel_Pacific_Oak_US_Reit price chart

You can find the full report here and the company website here

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