RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on Keppel Pacific Oak US REIT (KORE) with an unchanged target price of 92 US cents, following KORE’s latest business update for the 1QFY2022 ended March period.
KORE delivered a solid 1QFY2022 ended March with distributable income up 11% y-o-y and an estimated distribution per unit (DPU) of 1.6 cents (+1% y-o-y), in line with the analyst’s expectations.
In its 1QFY2022 business update, the REIT’s management forecasts leasing velocity to improve in coming quarters with mid-single-digit positive rent reversions expected. A minimal impact is expected from rising inflation and utility costs with the majority being net leases.
During the quarter, a slight dip in occupancy was experienced, with overall occupancy dipping by 0.2 percentage points (ppt) to 91.7% mainly due to the departure of tenants at Powers Ferry, Atlanta and The Plaza buildings. This was partially offset by higher occupancies at Iron Point and One Twenty Five. However, management is in discussions with prospective tenants and is confident of backfilling it in coming quarters which should result in a rebound and higher occupancy levels.
Additionally, leasing momentum slowed slightly to approximately 147,000 sq ft (-41% q-o-q), bit this is expected to improve with more employees returning back to offices. The physical occupancy of KORE’s assets has been increasing at approximately 55%.
Although rent reversion slightly slowed to +2.4% as compared to +6% for FY2021 ended December 2021, KORE noted that it was mainly due to a combination of markets in which leases expired this quarter. “With market rents on a rising trend since 3QFY2021 and in place rents approximately 8.9% below asking rents, we expect full year rental reversion to be in positive mid-single digits,” says Natarajan.
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Meanwhile, KORE’s gearing is at 37.5% which offers a potential debt headroom to acquire assets of US$100-$200 million this year in the analyst’s view, with cap rates in its existing markets still holding up at 5.5%-7.5%.
The management remains open to divesting some of its smaller assets and recycling capital. With regards to The Plaza redevelopment, plans are underway to build a multifamily asset on top of the existing parking garage, with KORE currently working with authorities on clearing regulatory hurdles to provide further updates by next two quarters.
To the end, Natarajan expects minimal impact from rising rates and utilities, as a majority of KORE’s leases are on net basis, with the exception of slightly higher costs on vacant spaces. “Its strategy of signing shorter leases also puts it in a good position to negotiate higher rents upon expiry. 84% of its debt is hedged and every 50 basis points (bps) increase in rates will have a 1% impact to its DPU,” says Natarajan.
As at 4.04pm, units of KORE are trading at 4 cents down or 0.73% lower at US$5.46 at a FY2022 P/B ratio of 0.9x and dividend yield of 8.7%.
