Keppel-KBS US REIT started at Buy by RHB as proxy to US office sector

U.S. five dollar currency notes bills; taken September 2018.

RHB started Keppel-KBS US REIT at Buy with a US$0.88 target price, saying its unit price is undervalued giving yields of around 8 percent.

“Keppel-KBS US REIT’s portfolio of 13 freehold U.S. office assets – with properties located across key growth markets – offers investors a good proxy to the rising U.S. office sector,” the brokerage said in a note Friday.

It noted most of the assets are in the key growth markets of Seattle, Austin, Atlanta and Orlando, where key office metrics, such as employment growth and population, have “strongly outperformed” the broader U.S. market on a five-year average.

“This has immensely benefitted KORE, with healthy improvements seen in occupancy and rent in recent years,” RHB said.

It noted the REIT’s average rent for leases expiring in 2019-21 are in the US$22 to US$22.50 per square foot range, around 15 percent below the weighted average asking rents of US$26, pointing to rental growth potential over the next three years.

RHB estimated a three-year compound annual growth rate (CAGR) of 7 percent a year for the REIT’s distributable income, revenue and net property income, amid a boost from occupancy improvements in the Austin, Seattle and Houston assets.

The current yield of the unit is around 8 percent, a more than 250 basis point spread to Singapore office REITs, RHB said.

It added that its target price has an implied yield of 7 percent, a more than 150 basis point premium to S-REITs and more than 500 basis points higher than U.S. 10-year Treasurys. RHB noted Keppel-KBS US REIT’s U.S.-listed peers have an average forward divided yield of 3.8 percent.

RHB indicated it didn’t expect the premium would last.

“With the recent tax clarifications (i.e. no changes to its tax efficient structure), we believe the high yield gap looks unjustified, and expect more yield compression ahead,” RHB said. “It is also important to note that the U.S. office assets are freehold in nature, and have in-built rental escalation clauses, which enhances their appeal compared to a typical 99-year lease for Singapore commercial assets.”

The unit was flat at US$0.81 at 11:57 A.M. SGT.

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