RHB Group Research has kept its “buy” call for Keppel Pacific US REIT (KORE) with a higher target price of 90 US cents ($1.22), up from 84 US cents previously, after it announced its 1HFY2021 ended June results on July 26.
See: KORE’s 2Q DPU rises 1.3% y-o-y to 1.58 US cents
RHB analyst Vijay Natarajan views the REIT’s 1HFY2021 results as “solid” and in line with his estimates. The REIT reported a distribution per unit (DPU) of 3.16 US cents for the 1H, up 1.9% y-o-y, supported by positive rent reversions and rental escalations plus lower expenses, which offset a lower occupancy and car park income.
“Despite recent outperformance, KORE’s high trading yields are unjustified in our view and we see more room for compression post its index inclusion which would result in an increased visibility among institutional investors and enhanced trading liquidity,” Natarajan comments in a July 27 note.
KORE is expected to be included in the FTSE/EPRA Nareit index in the September review.
Given the impending inclusion, Natarajan has cut his cost of equity assumptions by 40 basis points to reflect increased liquidity and visibility, which underpins his higher target price.
Despite a dip in portfolio occupancy in the 1HFY2021 by 1.1 percentage points on a q-o-q basis, Natarajan believes this will improve in 2HFY2021 given an increase in leases signed in the 2Q, higher leasing inquiries, and an anticipated increase in office demand as workers return to offices.
“With the expected return to the office in 4Q of more professionals in the US, we anticipate office leasing momentum to pick up and KORE’s strategically located assets in fast-growing markets to benefit,” he says.
Positive rent reversion is also expected to continue in the coming quarters, with management forecasting low-to-mid-single digits for the full year.
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Natarajan is also upbeat on the redevelopment of The Plaza in Seattle, which may drive upside for the REIT. “KORE has commenced preliminary studies for a new five-story multi-family building in downtown Bellevue, which is intended to be constructed atop the site’s existing sixlevel parking garage. More details on proposed development is expected in 3Q/4Q which should be a positive catalyst with strong demand for multifamily assets in the US,” he says.
He also expects KORE to acquire one or two assets in the 2H worth a total of between US$100-300 million.
As at 3.15pm, units in KORE are down 1.5 cents or 1.88% lower at 78.5 US cents.
