Keppel KBS US REIT delivers distribution per unit of 2.32 US cents

bellevue tech centre keppel kbs us reit

Keppel KBS-US REIT posted their inaugural distribution of 2.32 US cents for the period since listing (9 Nov 2017 to 31 Mar 2018), beating the IPO forecast of 2.31 US cents marginally.

According to the REIT manager, the stable portfolio performance and one-off compensation income resulted in net property income of US$22.3m, beating IPO forecast by 5.2%.

The one-off compensation was from a tenant at Westmoor Centre in Denver, Colorado, that was granted permission to terminate its lease on 28 Feb 2018, ahead of expiry in mid-2018.

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This was in connection with a new lease commencing July 2018 for an existing tenant that desired to expand into the space. The one-off income was commercially negotiated to offset the anticipated drop in rental income, and will be used to offset the anticipated drop in distribution from 2Q 2018 to 4Q 2018 in relation to the downtime and rent-free period for this space.

The early lease termination follows the Manager’s proactive engagement with both tenants to reconfigure and rationalise spaces to meet tenants’ business needs.

Actual gross revenue came in at US$36.1m, compared to forecasted of US$35.5m.

According to Keppel KBS-US REIT’s results presentation, the NAV per unit is in line with unit price of at US$0.88, indicating that the REIT is fairly valued.

Annualized distribution yield stands at 6.7%, comparable to other Singapore listed office REITs, while aggregate leverage is low at 33.6%.

The low aggregate leverage affords the manager and opportunity to utilize a significant amount of debt for any upcoming purchases.

Keppel KBS-US REIT’s assets are located in Washington, California, Colorado, Texas, Georgia and Florida, which are key growth markets according to the manager.

All the assets have occupancies above 80%, with the highest being Iron Point (Sacremento) at 99.% followed by Maitland Promenade II (Orlando) at 99%.

The average occupancy of the REIT is 89.8% and all the properties are on land with a freehold tenure.

The tenants are concentrated mainly in the professional services (35%), finance and insurance (24%) and technology (22%) sector, based on committed occupancy and NLA.

For the new leases that were signed in since IPO, they were signed at 2% to 4% higher than previous rates.

A majority of the news leases have built-in rental escalations of between 2% and 3%, affording the REIT a yearly uplift as the leases roll along.

A majority of the leases at 32% by NLA expire in 2023 and beyond, offering the REIT security of income in the near future. Between 2018 to 2022, the leases, by NLA, generally expire on an even basis of about 13%. There are no years where there is a significant spike in expiry.

Average cost of debt at 3.4% is slightly higher than other office REITs where borrowing costs are in the 2% to 3% range.

At an average term to maturity of 4.1 years for the REIT’s borrowings, there is security with regards to the REIT’s borrowings in the short to medium term.

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50% of the REIT’s debt will be expiring each in 2021 and 2022.

Similar to many other REITs which fix their cost of debt, 75% of Keppel KBS-US REIT’s debt is fixed.

According to CoStar, the technology sector will continue to be the main driver for leasing demand, consistent with 2017.

In addition, the co-working space and life science sector will be an additional source of expansionary demand.

The manager remains committed to delivering sustainable distributions and strong total returns to unitholders.