High-Growth US Markets And Returning Office Demand Will Drive A Powerful REIT Recovery

Catalysts

About Keppel Pacific Oak US REIT

Keppel Pacific Oak US REIT owns and manages a diversified portfolio of office assets in high growth, business friendly U.S. markets to generate stable income and long term total returns.

What are the underlying business or industry changes driving this perspective?

• Strategic focus on high growth U.S. markets such as Dallas, Austin, Bellevue, Redmond and Houston, where population inflows, low taxes and pro business policies are drawing companies out of traditional gateway cities and support sustained rental growth, portfolio occupancy and revenue.
• Strengthening return to office momentum, with U.S. office traffic recovering to more than 70 percent of pre pandemic levels and many blue chip finance and tech firms adopting stricter in office policies, underpins durable space demand and supports higher effective rents and earnings.
• Exposure to resilient, expanding industries including technology, TAMI, finance, professional services and medical and health care, combined with tenants actively seeking expansions and early renewals, provides a visible pipeline for leasing, which can lift occupancy, rental income and net margins.
• Limited new competitive supply in key submarkets, where much of the ongoing construction is already pre committed to large corporates, positions the existing portfolio to benefit as the cycle moves into a rising phase, tightening vacancies and improving rental spreads and net property income.
• Disciplined reinvestment in assets through targeted capital expenditure on lobby upgrades, spec suites and tenant improvements enhances building quality and leasing velocity, supporting positive rental reversions, stronger tenant retention and a recovery in distributable earnings.

Assumptions

This narrative explores a more optimistic perspective on Keppel Pacific Oak US REIT compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Keppel Pacific Oak US REIT's revenue will grow by 2.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -10.6% today to 63.4% in 3 years time.
• The bullish analysts expect earnings to reach $101.4 million (and earnings per share of $0.09) by about December 2028, up from $-15.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $64.4 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.3x on those 2028 earnings, up from -16.1x today. This future PE is lower than the current PE for the SG Office REITs industry at 26.3x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural softness in parts of the U.S. office market may persist despite a cyclical recovery. KORE has already flagged significant known vacates in assets such as The Plaza Building, Bellaire Park and Westmoor, and is only targeting mid to high 80 percent occupancy by end 2025 rather than a clear path back toward pre pandemic levels. This could cap rental income growth and pressure net property income and earnings over the medium term.
• Rising and volatile interest rates remain a secular headwind for leveraged real estate vehicles. Management is guiding to a higher average cost of debt of about 4.8 percent by year end 2025, while only 25.7 percent of loans are hedged and about 2 years of weighted average debt maturity remain. Any further increase in SOFR or refinancing spreads could compress income available for distribution and net margins even if revenue grows modestly.
• Ongoing elevated capital expenditure needs, including a planned 50 million dollars of spending largely on tenant improvements and lobby upgrades such as the U.S. Bank building in Bellevue, reflect a competitive leasing environment that structurally demands higher incentives and ongoing refurbishment to attract tenants. This risks eroding free cash flow and delaying a sustainable recovery in distributable earnings and future distributions.
• The decision to suspend distributions through at least first half 2026 as part of the recapitalization plan, coupled with a strategy to restart payouts at substantially lower levels and grow them slowly over time, signals that internal cash generation may remain constrained for several years. This could reflect weaker underlying profitability and limit upside to earnings and income available for distribution even if occupancy stabilizes.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Keppel Pacific Oak US REIT is $0.4, which represents up to two standard deviations above the consensus price target of $0.31. This valuation is based on what can be assumed as the expectations of Keppel Pacific Oak US REIT's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $0.4, and the most bearish reporting a price target of just $0.23.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $159.8 million, earnings will come to $101.4 million, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $0.24, the analyst price target of $0.4 is 40.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.