RHB Group Research analyst Vijay Natarajan has maintained “buy” on Keppel Pacific Oak US REIT (KORE) with a higher target price (TP) of 84 US cents ($1.11) from 80 US cents previously, on a better-than-expected distribution per unit (DPU) for the FY2020.
KORE, on Jan 27, reported DPU of 6.23 US cents in FY2020, up 3.7% y-o-y.
See: KORE reports annual DPU growth in FY2020 supported by an acquisition, rental escalations and rental reversions
“Despite Covid-19’s severe impact on US office leasing momentum, Keppel Pacific Oak US REIT’s tech-focused portfolio continues to outperform with positive rent growth and relatively stable occupancy,” he writes in a Jan 28 report.
“Limited FY2021 lease expiries, low expiring rents, and office demand shifts to low-tax states will continue to benefit its portfolio. Valuations are unjustified at 0.9 times price-to-book value (P/BV) vs the sector’s -1.2 times,” he adds.
Despite market uncertainties in the US office leasing outlook, Natarajan says he sees KORE’s portfolio benefitting from three key factors, which are, “the tech focus in Seattle and Austin, office tenant migration to low-cost and low-tax states [such as Texas and Florida], and minimal tenant concertation risk”.
“These factors are driving positive rent reversion of 10.2% for FY2020 (though the pace declined in 2HFY2020) and, with asking rents still 8% below market level, KORE expects mid-single digit positive rent reversions for FY2021,” he notes. “Only 13% of leases by rental are due for renewal in FY2021-2022.
Natarajan has also increased his DPU estimates for FY2021 and FY2022 by 2-3%, factoring in higher rents and interest cost savings.
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The REIT reported that it plans to acquire up to US$200 million worth of assets in 2021 depending on the fit.
“With good debt headroom of US$200 million (assuming 45% levels) and low borrowing costs, we see room for inorganic growth. Potential target markets – other than its existing ones – are key growth cities like Salt Lake City, Nashville, Charlotte, and Phoenix, among others,” he says.
As at 11am, units in KORE are trading 2.5 cents lower or 3.4% down at 71 US cents.
