RHB Group Research’s Vijay Natarajan has maintained his “buy” rating and target price of 80 US cents on Keppel Pacific Oak US REIT (KORE), citing a “strong set of 3Q numbers with healthy double digit rent reversions.”
Natarajan said KORE’s management shared that despite a prolonged COVID-19 pandemic, it expects its US office portfolio to stay resilient, backed by “good fundamentals in its submarkets, a diversified tenant base and low expiring rents.”
He added that valuations are attractive with a FY2020 yield of 8.7%, higher by more than 300 basis points than the yield for office S-REITs.
Natarajan also said KORE’s 3Q distributable income rose 19% y-o-y, driven by contributions from One Twenty Five in Dallas, portfolio occupancy improvement, rental growth and escalations.
As such, he revised his forecast for KORE’s FY2020-2022 distribution per unit (DPU) by 1-3%, factoring in a stronger occupancy and rent growth but lowered our longer-term growth outlook in light of Covid-19 uncertainties.
Natarajan noted KORE’s portfolio registered a strong year to date (y-t-d) rent reversion of +14%, underpinned by low expiring rents and good location attributes.
As the rents currently in place are still at about a 10% discount to asking rents, management expects positive rent reversions to continue in 2021, but in the mid to high single-digit range.
However, portfolio occupancy declined 1.5 percentage points q-o-q to 92.8%, driven by occupancy decline in Westech 360, Northridge Center I&II and The Plaza buildings.
This was due to a non-renewal of some of the leases and limited leasing activities in light of Covid-19 restrictions.
But despite this, he still expects overall occupancy to remain at over 90%. Natarajan said office demand is still mainly driven by the tech and professional services sector, and added KORE is willing to sign some short-term leases of 1-2 years in the near-term, in order to help tenants tide through the current market uncertainties.
See also: Keppel Pacific Oak US REIT posts 18.5% growth in 3Q distributable income to $14.7 mil
About 1% and 13% of leases are due for renewal in FY2020 and FY2021.
Natarajan noted rental collection in 3Q stands healthy at 98%, surpassing the REITs own expectations. Rent deferment requests have eased in 3Q, and management expects minimal requests ahead, barring a prolonged pandemic.
Overall, rent deferments have been granted for about 6% of its portfolio by rental income, and many of these rents are already commencing scheduled repayments.
Rental relief impact was about 1.1% of 9-month net property income, mainly among retail tenants.
KORE has also minimal exposure to retail (below 2%), co-working (below 2%) and oil & gas tenants (below 1%) which have been affected since the start of the year.
He noted the REIT’s cap rates have “broadly remained stable” so far, and overall it expects a valuation decline of 1-5% for 2020. Gearing remains comfortable at 37.7% with no refinancing concerns. Pay-out ratio is also expected to be maintained at 100% levels in the near-term.
As at 10 am, shares of KORE traded at 72 US cents, with a price to book ratio of 0.88 and dividend yield of 8.7%.
