Analysts from DBS Group Research and RHB Group Research are keeping “buy” on Keppel Pacific Oak US REIT (KORE) after the REIT saw distribution per unit (DPU) for the FY2021 ended December grow by 1.8% y-o-y to 6.34 US cents (8.53 cents).
DPU for the 4QFY2021 also increased by 2.6% y-o-y to 1.60 US cents.
The higher DPUs were due to the REIT’s newly-acquired assets in the 2HFY2021, and are in line with the estimates by DBS analysts, Rachel Tan, Geraldine Wong, Dale Lai and Derek Tan.
The analysts have also kept their target price on KORE unchanged at 85 US cents, which implies a yield of 7.4%, risk-free rate of 2.5% and a price-to net asset value (P/NAV) of 1 times.
The way they see it, KORE has a unique exposure to the technology sector; its assets in the tech hubs of Seattle, Austin and Denver contribute to over 60% of KORE’s net property income (NPI).
The REIT also stands to benefit on the reopening of the US and the return-to-office exodus in the country, which starts from mid-2021.
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Key positives to the REIT include its stable portfolio occupancy, positive rental reversions and its occupancy of close to 90% for 1800 West Loop.
On the other hand, key negatives include a larger decline in occupancy for some of KORE’s assets.
RHB analyst Vijay Natarajan has upped his target price estimate on KORE to 92 US cents from 90 US cents, as he sees several positives to the REIT.
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“Office outlook for its core tech markets (Seattle, Austin, and Denver) remains strong despite the Omicron threat, with higher leasing demand and positive rent reversions expected. Management remains on the lookout for acquisition opportunities, and is likely to divest some of its smaller office assets in the future,” he writes.
To him, KORE’s valuation is compelling at 0.9 times price-to-book (P/BV) and 9% yield.
Despite the current market challenges, KORE’s DPU also remains on the uptrend, notes Natarajan. Its balance sheet is also well-poised to cushion the impact of interest rate hikes. As it is, KORE has 83.4% of debt hedged and 8% due for refinancing in FY2022.
“KORE guided that a potential 100 basis point (bp) rise in rates will result in 12 US cents (2%) impact to DPU,” says Natarajan in a Jan 28 report.
In FY2022, the analyst estimates that the REIT will see rent growth of around the mid-single digits.
“KORE’s under-rented portfolio continues to deliver strong positive rent reversions (FY2021: +6%), while 4Q reversions were lower at 1.4% mainly due to leases renewed in some of its weaker markets. Overall in place rents are still 5% below asking rents and management expects positive rent reversions for FY2022 similar to FY2021,” he adds.
The REIT’s acquisition value for FY2022 is also likely to exceed that of FY2021, where it acquired two assets in Nashville and Denver for US$107 million in FY2021.
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“Transaction activity has picked up since the start of the year with cap rates in its focus markets currently in the 6-7% range. Management is also open to divest some of its smaller assets (especially Atlanta) at the right opportunity,” says Natarajan.
“There is also redevelopment potential at The Plaza, where plans are underway to build a multifamily asset on top of the existing parking garage,” he adds.
Finally, the higher target price pegged by the RHB analyst is due to his higher ESG score given to the REIT.
KORE’s ESG score was raised “by one notch” to 3.0 due to its sharpened focus on sustainability to reduce 30% of greenhouse gas emissions by 2030 from 2019.
The REIT is also looking to embark on energy and water savings.
The higher score resulted in the removal of the 2% ESG discount, which resulted in a higher target price, says Natajaran.
Units in KORE closed 0.5 US cent higher or 0.68% up at 74 US cents on Feb 7, or an FY2022 P/B of 0.92 times, according to RHB’s estimates.
