UOB Kay Hian has started “buy” on Keppel Pacific Oak US REIT (KORE) with a target price of US$1.10 ($1.49), implying a 47.7% upside to the 74.5 US cents at market close on Aug 23.
KORE has a diversified portfolio comprising office real estate in growth cities in the US. It owns 15 freehold office buildings and business campuses in nine markets namely Seattle – Bellevue/Redmond, Austin, Denver, Nashville, Houston, Dallas, Orlando, Sacramento and Atlanta.
To date, KORE has five properties in three Super Sun Belt cities namely Atlanta, Dallas and Houston, which accounted for 19.0% of assets under management (AUM). The REIT also owns six properties in four 18-hour cities, Seattle, Austin, Denver and Nashville, which accounted for 71.4% of AUM.
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These cities, according to analyst Jonathan Koh, are high-growth magnets that attract an influx of companies and people, due to low or no state-level taxes.
To be sure, Americans have been migrating to the South and West regions over the past 50 years, although the rate of in-migration from high-tax to low-tax states have increased due to the Trump-inspired Tax Cut & Jobs Act of 2017, Koh notes in his report dated Aug 24.
The cities, which KORE is focused on, is also oriented towards growth from technology companies. The tech hubs of Seattle – Bellevue/Redmond, Austin and Denver contributed 60.9% of KORE’s net property income (NPI) in 1HFY2021.
In its portfolio, 35.8% of portfolio net lettable area (NLA) is occupied by quality tenants from the high-growth technology sector as well as defensive medical and healthcare sector.
Seattle has benefitted from the continued expansion of Amazon and Facebook while Austin has attracted investments from Tesla and Samsung Electronics. Denver has become a “Wall Street of the West” and a fintech hub.
The REIT has also seen consistent positive rental reversion, which is a plus, in Koh’s books.
“KORE recorded positive rental reversion of 7.6% in 2018, 14.3% in 2019 and 10.2% in 2020. Positive rental reversion was 5.4% in 1HFY2021 driven by higher rents in Seattle – Bellevue/Redmond. In-place passing rents are about 8% below asking rents due to recurrent growth in rents from Super Sun Belt and 18-hour cities, providing room for continued positive rental reversion,” he writes.
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As at 10.21am, units in KORE are trading flat at 74.5US cents or an FY21 P/B of 0.9 times and a DPU yield of 8.6%, according to UOBKH’s estimates.
Photo: KORE
