Keppel-KBS US REIT, a US-focused office REIT, made its trading debut on the Mainboard today. It has an initial portfolio of 11 freehold office properties across seven key markets in the US.

In its IPO prospectus, it has identified some drivers for the US office real estate market which include stable US economic growth trajectory, favourable outlook in the office real estate sector, and continued interest in office real estate investments.

Prior to Keppel-KBS US REIT’s IPO, SGX lists a total of 41 REITs and property trusts with a combined market capitalisation of S$85.9 billion. The 41 REITs and property trusts have an average dividend yield of 6.3% and have generated a market capitalisation weighted average total return of +23.1% in the YTD.

Drivers of the US Office Real Estate Market

 In its IPO prospectus, Keppel-KBS US REIT has identified some drivers for the US office real estate market:

  • Stable US economic growth trajectory – Latest estimates from US’s Commerce Department indicates gross domestic product (GDP) for 2Q2017 at 3.1%, higher than the projected 3% driven by consumer spending. US GDP is expected to average 2.0% through 2021 (Cushman) coupled with improved consumer sentiments (US consumer confidence index increased 20% since Oct 2016).
  • Favourable outlook in the office real estate sector – National office occupancy rates have been increasing, reaching approximately 87% in 2016. Completion of new office supply also expected to peak in 2017 and national average asking rent for office space has reached a record high of US$29.94 per sq ft in 1Q2017. This is expected to continue to rise to over US$35.00 per sq ft by 2021.
  • Continued interest in office real estate investments– Real estate investments in the US totalled approximately US$494.1 billion in 2016 with approximately 29% in office assets (second largest after apartments at 32%). Over the last two years, Asian investment forms the highest proportion of foreign investment into US real estate, and 47.7% (or US$31.7 billion) of foreign investments in 2016 were in the office sector.

Keppel-KBS US REIT’s IPO

Keppel-KBS US REIT is US-focused real estate investment trust (REIT), which offers investors the opportunity to gain exposure to a diversified portfolio of income-producing commercial real estate assets in the US. The initial portfolio will comprise 11 freehold office properties across seven markets in the US. Some key extracts from Keppel-KBS US REIT’s prospectus include:

Business Strategies and Future Plans

  • Proactive asset management and optimisation of properties in the portfolio to grow revenue and property income for long-term business sustainability.
  • Capital management strategy to finance acquisitions, and adopt financing policies to optimise risk-adjusted returns to unitholders.
  • Investments and acquisition growth strategy to grow portfolio to enhance unitholders’ returns and provide opportunities for future income and capital growth.

Competitive Strengths

  • Strategically located assets in attractive office markets with strong demand and limited supply.
  • Diversified tenant base led by tenants in growth and defensive sectors such as technology, finance and insurance, professional services, medical and healthcare.
  • Stable lease profile with significant proportion of the leases based on fixed annual rental escalations.
  • Reputable sponsors and US asset manager with strong track record.
  • Experienced management team with expertise and focus on execution excellence.

Key Risks (page 65 of IPO prospectus shows complete list of risk factors)

  • Limitations on ownership, unitholders are prohibited from directly or indirectly owning in excess of 9.8% of the outstanding units.
  • Changes in US tax laws may have adverse consequences unitholders, such as income tax laws governing US REITs or US taxpayers.
  • The Parent US REIT and the Sub-US REITs may lose their status as US REITs, which would result in having to pay significant income taxes.
  • The REIT may be adversely affected by economic and real estate market conditions, and exposed to regulatory, fiscal and other governmental policies changes in the US.
  • The REIT’s ability to make distributions is dependent on its financial position of its subsidiaries.
  • The REIT may be exposed to risks such as exchange rate fluctuations and regulation changes.

Financials from Prospectus

  • According to the unaudited pro forma financial statements, gross revenue in FY16 (year ended 31 Dec 2016) was at US$80.0 million, a 6.7% YoY increase.
  • Net property income in FY16 was US$44.6 million, increasing 8.7% YoY. Net income after tax and fair value change in investment properties in FY16 was US$18.3 million, increasing 35.6% YoY.
  • The REIT has a distribution policy to distribute 100% of its annual distributable income for FY18* and FY19*. Thereafter, the REIT will distribute at least 90% of its annual distributable income for each FY. It has a projected distribution yield of 6.8% for FY18 and 7.2% for FY19 based on offering price US$0.88.
    * For the period from Listing Date to the end of Projection Year 2019

Valuation

  • According to the prospectus, Keppel-KBS US REIT’s unaudited FY16 net asset value (based on 628,565,000 units in issue) was at US$0.84. This implies a FY16 price-to-book (P/B) ratio of 1.05x based on the offer price of US$0.88.
  • Aside from Keppel-KBS US REIT, SGX lists another US-focused office REIT, which provides investors with the opportunity to gain exposure to US office real estate assets. Manulife US REIT has a market capitalisation of US$931.5 million (S$1.3 billion).
  • Prior to Keppel-KBS US REIT’s IPO, SGX lists a total of 41 REITs and property trusts with a combined market capitalisation of S$85.9 billion and a market capitalisation weighted P/B ratio of 1.0x. The 41 REITs and property trusts have an average dividend yield of 6.3% and have generated a market capitalisation weighted average total return of +23.1% in the YTD.
  • Of the 41 REITs and property trusts, there were six Office REITs (GICS®) which make up 15% of the REITs and property trusts cluster.

List of Office REITs (GICS®) on SGX

Name SGX Code Market Cap S$M Last Price* Total Return YTD % Total Return 1 Yr % P/B (x) Gearing % Dvd Ind Yld %
CapitaLand Commercial Trust C61U 6,531 1.810 33.3 26.9 1.0 32.7 5.1
Keppel REIT K71U 3,969 1.180 21.9 14.6 0.8 32.9 4.9
Manulife US REIT** BTOU 1,268 0.905 20.5 23.4 1.1 33.6 6.9***
Frasers Commercial Trust ND8U 1,140 1.415 20.7 14.8 0.9 34.6 7.0***
OUE Commercial REIT TS0U 1,096 0.710 9.5 8.7 0.8 37.7 6.9
IREIT Global UD1U 481 0.770 16.6 15.0 1.2 41.4 8.0
Average       20.4 17.2 1.0 35.5 6.5
Market Cap Weighted Average   25.7 20.5 0.9 33.7  

Source: Bloomberg & SGX StockFacts (data as of 8 November 2017).
*Last price of companies are denoted in their respective trading currencies.
**Manulife US REIT is traded in USD. Except for Last Price, SGD equivalents are shown in table.
***Dividend yields for Manulife US REIT and Frasers Commercial Trust are based on 12 month dividend yield.

Additional Information from Prospectus (click here)

Company Background

Keppel-KBS US REIT’s initial portfolio has 11 freehold office properties in the US, with an aggregate net lettable area (NLA) of over 3.2 million sq ft. The properties are a mix of CBD and suburban office buildings located in the West Coast (Seattle, Sacramento), Central Region (Houston, Austin, Denver), and East Coast (Atlanta, Orlando). The REIT’s initial portfolio has a committed occupancy rate of approximately 90% (at 30 Sep 2017) and a current occupancy rate of approximately 88.1% (at 30 Jun 2017).

Sponsors of the REIT are Keppel Capital (asset management arm of Keppel Corporation) and KBS Pacific Advisors (a commercial real estate investment manager in the US).

IPO Details

  • Offer price at US$0.88
  • 8 million units under the offering (subject to over-allotment option) comprising:
    • 7 million shares under the placement tranche
    • 1 million shares under the public offer
  • Estimated IPO market capitalisation at US$553.1 million (assuming the over-allotment option is not exercised)

Cornerstone Investors

At the same time as but separate from the offering, each of the Cornerstone Investors have entered into separate subscriptions agreements with the manager of the REIT. The Cornerstone Investors are Affin Hwang Asset Management Bhd, Credit Suisse AG, DBS Bank, DBS Bank (on behalf of certain private banking clients), and Hillsboro Capital. For more information, please refer to page 96 of the Prospectus.

Over-allotment Option

An option granted by the Unit Lender to the Joint Bookrunners to purchase from the Unit Lender up to an aggregate of 31.4 million units at the Offering Price, solely to cover the over-allotment of units (if any).


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