Analysts at RHB Bank Singapore and UOB Kay Hian are keeping “buy” on Keppel Pacific Oak US REIT (KORE) CMOU following 1HFY2023 ended June results, which were largely in line with expectations.
For 1HFY2023, KORE’s adjusted distribution per unit (DPU) declined 12.6% y-o-y mainly from higher interest costs, while DPU fell by 17.2% y-o-y as management fees were fully paid in cash.
Net property income, on the other hand, increased 1.4% y-o-y on the back of better performance from KORE’s existing properties despite the divestment of two Atlanta assets in 2HFY2022.
RHB analyst Vijay Natarajan notes that no revaluations were conducted for 1HFY2023. However, based on its assessment and discussions with valuers in its markets, KORE does not see a material decline at this juncture, he points out.
“Its operational performance still holds up well against the broad market challenges faced by the US commercial sector, thereby emphasising the REIT’s differentiated portfolio merits,” says Natarajan.
In 1HFY2023, KORE’s portfolio occupancy dipped by 1.1 percentage points q-o-q to 90.8%, mainly on lower occupancy across all three of its Seattle assets. While there has been some tenant movements in Seattle, KORE is in active discussions to backfill some of these vacancies.
See also: Test debug host entity
Its largest asset, The Plaza, should see some near-term occupancy rate pressure, says Natarajan. Overall, however, KORE had guided that it targets to maintain a portfolio occupancy rate of around 90% by the end of 2023, he adds.
Leasing activity was muted in 2QFY2023 at about 70,000 sq ft, but is expected to improve in tandem with the slightly better economic outlook and improvement in the rate of workers returning to the office, Natarajan points out.
Rental reversion for the period stood at -4.6%, skewed by a large renewal/expansion lease at Maitland Promenade I and II. Excluding this, rental reversion was 4.0%, UOBKH analyst Jonathan Koh says.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
“KORE benefits from the migration of Americans in massive numbers to large Sun Belt metro areas and fast-growing suburban cities. Management expects rental reversion to be low single-digit for 2023 and is in discussions with prospective tenants in nuclear energy, healthcare, co-working and engineering sectors,” says Koh.
KORE has a modest gearing of 38.4%, which provides it with some buffer against a decline in valuation in these uncertain market conditions, says Natarajan. As such, a 10% to 15% decline in its valuation would still keep its gearing at 42% to 45%.
Natarajan highlights that KORE lacks tenant concentration risks. Its top 10 tenants account for only 23.7% of income and no tenants account for over 3.5% of its income. This limits vacancy and cash flow risks.
Koh expects the fair value of KORE’s investment properties to drop by 4% or US$57.5 million ($77.2 million) to US$1.39 billion as at end-2023, assuming the capitalisation rate for KORE’s portfolio expands by 25 basis points to 6.2%. Thus, UOBKH expects aggregate leverage to increase to 41.8% at end-2023.
UOBKH also expects KORE’s FY2024 DPU to decline by 22%, due to a 293 : 1,000 rights issue with issue price of 21 US cents to raise US$64.2 million as well as reduce the aggregate leverage to 38% at end-2024.
Following tightening occupancy rate assumptions as well as assumptions of higher financing costs, RHB has trimmed its FY2023 and FY2024 DPU estimates by 6% and 7% respectively. The analyst has lowered his target price to 56 US cents from 64 US cents previously.
Similarly, UOBKH’s Koh has also lowered his target price to 50 US cents from 68 US cents previously.
As at 4pm, units in KORE are trading 1.67% up at 30 US cents on Aug 3.
