Keppel KBS US REIT

Keppel-KBS US REIT ("Keppel US REIT") is offering 262,773,400 units at US$0.88 per unit (with over-allotment option). The REIT is established to invest in a diversified portfolio of income-producing commercial and real estate related assets in United States. While the IPO is not registered yet (should be in the coming days), the public offer will close on Nov 7 at 12pm.

(Side comments: It is quite difficult to locate the lodged prospectus on MAS website and I can never understand why SGX don't have it in the Catalogue either... you can find the link here. Having said that, i have to commend that this is a relatively easy to read prospectus with detailed information 👍)

Key Objectives

The key objectives are to provide unit holders with regular and stable distributions while maintaining appropriate capital structure and sustainable growth in DPU and NAV.

IPO Portfolio

The initial portfolio comprises 11 office properties in the United States as follows:

West Coast (3) - The Plaza Buildings in CBD of Seattle, Bellevue Technology Center close to Microsoft Global HQ in Seattle and Iron Point located in Folsom Sacremento.

Central Region (5) - Westmoor Center in Northwest Denver, Great Hills Plaza in Northwest Austin in Texas, Westech 360 in Northwest Austin Texas, 1800 West Loop South, West Loop I & II  in Houston.

East Coast (3) - Powers Ferry Landing East and Northridge Center I & II  in Atlanta and Maitland Promenade II  in Orlando, Florida. 

Distribution policy

The first distribution will be from Listing Date to 30 June 2018 and be paid to unitholders on or before 30 Sep 2018 (quite a long wait). The distributions will be declared in USD and can be paid in either USD or SGD, depending on the arrangement with the custodians. Subsequent distributions will be semi-annually thereafter.

What I like about the REIT

• Direct play on the United States - similar to Manulife US REIT, this offers the "second" pure play access to the US Real Estate market. If you are bullish about the US economy growth trajectory and the office real estate outlook, then this is a REIT which will provide that exposure. According to Cushman, the projected GDP growth will continue to be stable at around 2% but those in the IPO portfolio are above the national average (see chart below)

• Quality portfolio in key growth markets - Frankly i am not an expert in the US real estate market but based on the description, it seemed like the properties are well located and diversified in the cities of Seattle, Austin Texas and Atlanta. According to the prospectus, major US markets in which the IPO portfolio is located have experienced higher job growth in 2016 than previously estimated and these bode well for the US office real estate market and those properties in the IPO portfolio have growth rates that are above the national average (see chart below). Many of the cities serve as national or regional headquarters of Fortune 500 companies

• Attractive distributions with visible organic growth  - The yields look decently attractive to me with built in rental revisions that will help ensure improvement in DPU. In addition to the built in escalations, the prospectus provided a nice "uptrending asking rental chart" based on national average. 

Keppel US REIT is projecting the yield to increase from 6.8% in FY2018 to 7.2% in FY2019 as shown below.

This is underpinned by the below average lease rental which will be up for "renewal" in 2018 and 2019. Investors who want the projections can refer to page 64 of the prospectus.  

• Well diversified portfolio by asset and tenants mix and geographically. It also has a stable lease expiry profile - The income is highly diversified as demonstrated by the charts below with a stable lease expiry profile. No more than 20% of lease expire in a single year

• Freehold properties with decent leverage - All the properties in the IPO portfolio are freehold (same as Croesus Retail Trust) and at 36%, there is still much headroom to take on debt and the debt is not up for refinancing until 2021 and 2022. I like freehold properties 😀

• Strong institutional support

The issuance is well supported by cornerstone investors such as Affin Hwang, Credit Suisse, DBS and Hillsboro Capital. 

• Reputable sponsors and experienced team - I like the Keppel branding behind the combined Keppel-KBS name. It is a name which local investors can identify with and you know they are here for the longer term. While Keppel Capital is based here, KBS is headquartered in California with more than 180 specialists (See geographical footprint of KBS below)

Some of my concerns

• How long will the partnership last? The Manager is jointly owned by Keppel Capital ("KC") and KBS Pacific Advisors Pte. Ltd ("KPA"). The shareholders in KPA are 4 individuals from KBS Capital Advisors ("KBS"). KC is the asset management arm of Keppel Corporation. As in all corporate partnerships, they will not last forever and eventually they will split. 

• Rights issues is unavoidable, investors have to be prepared for rights issue in future - As you can see from the article in Manulife US REIT, rights issues is unavoidable as the REIT starts to grow and acquire new properties. According to the prospectus, there is a strong pipeline of potential acquisition properties. As REIT has to distribute at least 90% of its income, investors in this REIT must be prepared to fork out cash when acquisition kicks in. 
• Forex exposure - For investors in Singapore, you will be exposed to USD at both the asset level as well as the distributions. Personally, i don't mind but for some investors, you may lose out on forex based on the share price movement and whenever the distributions are converted into SGD
• IPO at premium to NAV - The current NAV is US$0.84 (page 60 of the prospectus). Investors who subscribed at US$0.88 will be paying a slight premium to book of 1.047x. 
• Long waiting period till next distribution  - Investors who buy into existing REITs will get their distributions in the next 6-9 months, whereas IPO subscribers in this REIT will only receive their first distribution in Q3 2018. This makes it less attractive for investors who finance their acquisition with debt.   

Fair Value

The closest listed peers is actually Manulife USD REIT where my original write up is here. According to REITDATA and Shareinvestor, it is currently trading at a yield of 7.06% and a price to book of 1.09x.

Let's see how was its performance since launch. The IPO price was $0.83 and it languished for an extended period of time before investors appreciate it better and the price finally moved above its IPO price about 9 months later.

Keppel KBS US REIT is fairly priced at its IPO price of US$0.88 which represents around 6.8%-7.2% yield and price to book of 1.04x. 

Based on the valuation metrics of Manulife USD REIT, it should trade at a fair value trading range of between 85 cents (assuming investors require a minimum yield of 7% yield) and 92 cents (assuming Keppel USD REIT trades up to 1.09x book value).

My Ratings

As I have mentioned a few times, REITs are not meant for flipping. You invest only if you like the yield. As such, i will give it a one chilli rating for the IPO.

Having said that, i actually prefers this IPO to the Manulife USD REIT. I felt that investors are able to appreciate the Keppel branding and the well-diversified nature of the US IPO portfolio. If investors want to consider diversifying their REIT exposure beyond Singapore to the United States, this should be a name that can be considered. I will subscribe some shares for my longer term hold.

Polling time