UOB Kay Hian analyst Jonathan Koh has kept a “buy” rating on Keppel Pacific Oak US REIT (KORE) with a target price of US$1.07 ($1.47).
To the analyst, KORE has benefitted from the dispersion of jobs in the technology sector to outside of Silicon Valley, particularly with these regional technology hubs growing at a rapid pace. Some major technology companies like Hewlett Packard, Oracle, Palantir and Tesla have moved their headquarters from California to Texas as well.
The employment levels in the technology sector in nine cities – Atlanta, Dallas, Denver, Miami, Orlando, San Diego, Kansas City, St Louis and Salt Lake City – grew at CAGR of 5% between 2015 to 2019, according to a study by Brookings Institute.
The cities have increased their share of postings for tech jobs from 14.5% in 2016 to 16.0% in 2021. During the same period, the share of traditional hubs such as Boston, Bay Area, New York and Los Angeles, contracted from 40% to 31%.
KORE has presence in four of these cities on the rise, Atlanta, Dallas, Denver and Orlando, which accounts for 34.4% of its assets under management (AUM).
Management guided positive rent reversion at mid-single-digit in 2022, driven by Seattle (Bellevue/Redmond) and Sacramento. In-place passing rents are 8.9% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion.
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In addition, KORE also benefits from built-in average annual rental escalation of 2.4%.
Leasing on the Eastside continues to be dominated by technology companies, which accounted for 40% of new and renewed leases in 1QFY2022 ended March. The analyst observes that vacancy at Bellevue CBD sub-market is low at 4.5%, with 86% of the 3.8m sq ft of office space under construction is pre-committed to tenants, such as Amazon and Bungie.
Vacancy at the Redmond sub-market is tight as well at 3.2% as there is no new construction, the analyst notes.
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To this end, Koh expects KORE to achieve positive rent reversion for The Plaza Buildings at Bellevue CBD and The Westpark Portfolio at Redmond, which have 6.3% and 13.2% of (net lettable area) NLA up for renewal in 2022.
“KORE is also expected to achieve positive rent reversion for Iron Point at Folsom, which have 35.2% of NLA up for renewal in 2022,” writes the analyst.
Moreover, Koh sees asset enhancement for The Plaza Buildings, in light of how KORE has hired Pastakia and Associates for permitting and entitlement work on a new five-storey multi-family building in downtown Bellevue atop an existing six-storey car park at The Plaza Buildings. The site is 380m away from Bellevue Downtown Station, where light rail service is scheduled to commence in 2023.
The redevelopment is in line with KORE’s mandate to invest in commercial assets in key growth markets in the US. Management is currently weighing its options of holding the multi-family units for recurrent rental income, or asset recycling by divesting the multi-family units.
Overall, the analyst finds KORE unique due to its focus on suburban offices in magnet cities.
As at 11.51am, units in KORE are trading at 1 cent up or 1.44% higher at US 70 cents at FY2022 P/B ratio of 0.9x and DPU yield of 9.0%.
