Keppel Pacific Oak US REIT has reported lower distributable income for its 1QFY2023. However, analysts from UOB Kay Hian, RHB Singapore and DBS Group Research have all kept their "buy" calls on this counter, citing its attractive yield and hefty discount to book value.
For the three months to March 2023, KORE reported adjusted distributable income that's 12.5% lower y-o-y, due to higher financing costs, plus slightly lower occupancy rates.
In his April 19 note, UOB Kay Hian's Jonthan Koh, who has a 70 US cents target price on this stock, says that KORE's earnings was in line with his expectations.
He points out that the REIT's manager had changed its policy to take its fees in cash starting from 2QFY2022, instead of units. As such, if fees for 1QFY2022 had been taken in cash instead, the drop in 1QFY2023 would have been of a smaller magnitude.
While the overall US office market is under strain, growth continues for properties in certain locations. KORE, for one, continues to benefit from built-in annual rental escalation of 2.4% across its portfolio. Occupancy for 1QFY203 eased 0.7ppt to 91.9%.
Koh points out that KORE, having secured a US$180 million new loan facility back in Sept 2022, has used that to refinance borrowings of US$130 million due in November and January next year. With that, KORE has no refinancing requirements till next November.
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"We like KORE for its exposure to suburban office and Sun Belt states. KORE provides an attractive 2023 distribution yield of 13.8%. The stock trades at P/NAV of 0.45x (55% discount to NAV per unit)," says Koh.
Some US office properties in key cities have been hit by sharp devaluation. However, RHB's Vijay Natarajan, citing KORE's management, points out that KORE's core submarkets have held up "relatively well".
"As such, the REIT does not expect any significant decline in the valuation of its assets, of more than 5%, at this juncture. Acquisition is not a focus at present while divestments are unlikely as financing conditions remain tight, keeping buyers at bay," adds Natarajan, who has a 64 US cents target price on the stock.
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In its April 19 note, DBS Group Research says KORE's management "remains comfortable" on their top 10 tenants, although it is bracing for the possibility of some small downsizing of space. In the meantime, KORE will continue to monitor shadow space in the portfolio’s submarkets.
"Although still premature, management does not expect a major decline in their asset valuation as rents continue to hold up well in most of their buildings. Management believes that potential Fed rate cuts may moderate the decline in asset valuation," adds DBS, which has a 65 US cents price target.
