Analysts at RHB Group Research, UOB Kay Hian and DBS Group Research have kept their “buy” on Keppel Pacific Oak US REIT (KORE) with lower target prices due to higher risk free rate and interest rates. This follows a ‘relatively stable’ 3QFY2022 ended Sept 30 results announcement.
RHB analyst Vijay Natarajan says KORE’s strong quarter of operational numbers has defied broader market expectations of a sharp negative impact to the US office sector demand from an evolving hybrid working model.
“Its portfolio continues to benefit from its choice submarkets (Sun Belt cities) and well-diversified tenant base with limited concentration risks. Rising interest rates impact on financing costs is also well mitigated with no debt maturing until end 2024 and 77% of its debt hedged,” Natarajan adds. He has revised his target price to 74 US cents ($1.04) from 87 US cents previously, representing a 37% upside.
KORE achieved positive rental reversion of 5.3% for 3QFY2022, driven by The Plaza Building and The Westpark Portfolio at Seattle as well as Bellaire Park in Houston, says UOBKH analyst Jonathan Koh. Inplace passing rents remain 5% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion.
The REIT also continues to benefit from built-in annual rental escalation of 2.5% across its portfolio, Koh adds. Koh’s target price has been trimmed to 74 US cents from 80 US cents previously.
Portfolio occupancy saw a slight improvement of 0.5 percentage points q-o-q to 92.5%, excluding the divested Northridge Centre. Excluding Powers Ferry, which is slated to be divested, portfolio occupancy would have been 93.2%, DBS analysts Rachel Tan and Derek Tan point out.
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“Despite the numbers looking more stable this quarter, management expects the office market to remain volatile possibly until end-2023, as US companies continue to rationalise and right-size their office space as previously long leases come due. The percentage of downsizing varies, ranging from 20% to as high as 100%,” they add. DBS’s target price for KORE stood at 65 US cents from 78 US cents previously.
KORE completed the divestment of Northbridge Center I & II in Atlanta, Georgia for US$22.1 million in July. Koh expects KORE to recognise a small divestment gain of US$1.6 million in 3QFY2022. The REIT has also signed a sale and purchase agreement to divest Powers Ferry in the city.
In aggregate, Northbridge Center I & II and Powers Ferry contribute 2.7% of the group’s net property income as of June. Proceeds from the divestment of Northbridge Center I & II and Powers Ferry could be utilised for reinvesting in office properties in growth markets, or share buyback, Koh highlights.
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To factor in higher interest cost, DBS has revised its FY2022-FY2024 DPU estimates by 2%-8% while RHB’s Natarajan has lowered his FY2023-FY2024 DPU estimates by 3%.
“While the US office market remains volatile, KORE has kept its portfolio relatively stable. Currently, it is trading at 0.7x P/B, offering FY2023 yield of 10%, an attractive level to monitor as we await a potential recovery in the US office market,” the analysts add.
Meanwhile, UOBKH’s Koh has cut his DPU forecast by 8% for 2023 and 7% for 2024 due to the REIT’s change in policy to pay 100% of management fees in cash starting 2QFY2022.
As at 12.24pm, units in KORE is trading 2.5 US cents higher or 4.58% up at 57 US cents.
