Is Keppel Pacific Oak US REIT (SGX: CMOU) Share Price at US$0.62 Considered a Steal?
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Is Keppel Pacific Oak US REIT (SGX: CMOU) Share Price at US$0.62 Considered a Steal?

Sudhan P
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Keppel Pacific Oak US REIT‘s (SGX: CMOU) share price (technically known as unit price for REITs) is currently at US$0.62. 

At that unit price, Keppel Pacific Oak US REIT is valued at a price-to-book (PB) ratio of 0.8 and a distribution yield of close to 10%.

Does Keppel Pacific Oak US REIT look like an attractive investment for me at its current price and valuation?

Let’s explore using my 10-step guide to pick the best Singapore REITs.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

Formerly known as Keppel-KBS US REIT, Keppel Pacific Oak US REIT owns freehold commercial assets located across key growth markets in the US.

The REIT was listed on the Singapore stock market in November 2017 at an IPO price of US$0.88.

As of 31 March 2020, Keppel Pacific Oak US REIT had 13 freehold office buildings and business campuses in its portfolio.

Keppel Pacific Oak US REIT portfolio overview
Source: Keppel Pacific Oak US REIT 1Q 2020 operational updates

Keppel Pacific Oak US REIT is managed by Keppel Pacific Oak US REIT Management Pte Ltd, which is jointly owned by two sponsors, Keppel Capital (the asset management arm of Keppel Corporation Limited (SGX: BN4)) and KPA.

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

Keppel Pacific Oak US REIT has a financial year that ends on 31 December each year.

Let’s check out the REIT’s financial performance for the last two years.

 20182019
Gross revenue
(USS$' million)
93.5122.9
Net property income
(USS$' million)
56.774.8

Keppel Pacific Oak US REIT’s gross revenue and NPI have shown healthy increases in 2019.

Financial growth has been strong in each of the quarters in 2018 and 2019 as well.

Keppel Pacific Oak US REIT financial quarterly growth (2018 and 2019)
Source: Keppel Pacific Oak US REIT 2019 annual report

Keppel Pacific Oak US REIT’s growth streak continued in the first quarter of 2020.

The REIT updated the market in April that its gross revenue and NPI improved by 20.1% and 15.4%, respectively, year-on-year. The increase was mainly on the back of:

  1. Contributions from the newly-acquired One Twenty Five property in November 2019; and
  2. Positive rental reversions from leasing done last year.

Verdict: Pass 

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

With the higher gross revenue and NPI, Keppel Pacific Oak US REIT’s DPU has soared as well.

 20182019
Distribution per unit (US cents)
5.406.01

Verdict: Pass

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

For 2019, Keppel Pacific Oak US REIT had an NPI of US74.8 million and a portfolio value of US$1.26 billion.

The figures translate to a property yield of 5.9%.

Keppel Pacific Oak US REIT passes this criterion too.

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 March 2020, Keppel Pacific Oak US REIT had a gearing ratio (also known as “aggregate leverage”) of 36.9%, which is below my threshold of 40%.

Source: Keppel Pacific Oak US REIT 1Q 2020 operational updates

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

Keppel Pacific Oak US REIT had an interest cover of 4.2 times, at end-March 2020, which doesn’t meet my criterion. 

Source: Keppel Pacific Oak US REIT 1Q 2020 operational updates

Verdict: Fail

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

Keppel Pacific Oak US REIT’s portfolio ended March 2020 with a healthy committed occupancy of 94%.

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

For 2019, Keppel Pacific Oak US REIT posted a strong rental reversion of 14.3%, driven by higher reversions especially within the tech hubs of Seattle and Austin. 

The REIT continued its sturdy performance for its 2020 first-quarter with a rental reversion of 12%.

Verdict: Pass

8. Growth Prospects Check

One way for a REIT to grow is through built-in rental escalations.

On that note, Keppel Pacific Oak US REIT’s portfolio comes with built-in average annual rental increases of 2.6%, giving unitholders’ nice organic growth. 

Apart from organic growth, growth through acquisitions (inorganic growth) is another way for REITs to increase in size. 

In 2019, the Keppel Pacific Oak US REIT’s manager undertook two DPU-accretive acquisitions, extending its presence to a total of eight key growth markets of the US. 

The first purchase was Maitland Promenade I in Orlando, Florida, in January 2019, and the second was One Twenty Five in Dallas, a key economic hub of North Central Texas, in November that year.

The latter acquisition increased Keppel Pacific Oak US REIT’s exposure to the resilient medical and healthcare sector to 8.6% by net lettable area (NLA). 

Keppel Pacific Oak US REIT top tenants
Source: Keppel Pacific Oak US REIT 1Q 2020 operational updates

One Twenty Five will contribute fully to Keppel Pacific Oak US REIT’s 2020 financial results, and that’s something investors can look forward to. 

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At Keppel Pacific Oak US REIT’s unit price of US$0.62 right now, it has a PB ratio of 0.78x, which looks undervalued since it’s below 1x.

Verdict: Pass

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At Keppel Pacific Oak US REIT’s unit price of US$0.62, its distribution yield stands at 9.7%, which is above my criterion.

Verdict: Pass

The Final Verdict

Keppel Pacific Oak US REIT has a final score of 9/10.

The REIT ticks many of the boxes, including having strong rental reversion and low valuation. 

However, the US’ rising unemployment rate, which soared to a high of 14.7% in April due to the Covid-19 pandemic, is something that concerns me in the short-term.

I’ll be keeping a lookout for Keppel Pacific Oak US REIT’s 2020 second-quarter results to understand to what extent (if any) that the REIT has been affected by the health scare. 

Also, with Keppel Pacific Oak US REIT’s lack of track record as a listed entity, I’m not comfortable putting my money into it right now. 

Therefore, I’d place Keppel Pacific Oak US REIT on my watchlist to monitor it for the next couple of quarters. 

What Are Your Thoughts on Keppel Pacific Oak US REIT?

Why not check the Seedly Community and drop your question or analysis on Keppel Pacific Oak US REIT there.

Stock Discussion on Keppel Pacific Oak US REIT

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

REITs Tool

About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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