RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on Keppel Pacific Oak US REIT (KORE) with a lowered target price to US 87 cents ($1.20) from US 92 cents.
KORE’s operational numbers in 2QFY2022 ending December were in line with the analyst’s expectations.
Headline DPU declined mainly due to switching off entire management fees in cash, from all units previously, observes Natarajan.
“Portfolio occupancy improved slightly during the quarter with positive rent reversions, despite volatile market conditions in the US, underlining strength of its assets,” says the analyst. “Minimal impact is expected from rising interest rates and inflationary pressures.”
The REIT’s valuation remains cheap at 0.84x 2022 P/BV, says Natarajan.
KORE’s 2QFY2022 operational distribution per unit (DPU) was up 1% y-o-y while the final DPU declined 10% y-o-y on the back of management receiving entire fees in cash instead of units. KORE noted the move is to prevent dilution with its units trading well below NAV as well as to avoid share price pressures from it selling in the market. Management expects fees to be fully paid in cash moving forward.
In July, KORE also entered into a new US$180 million loan facility to refinance early its loans maturing in November 2023 and January 2024 which should remove any financing requirements until November 2024.
“In our view, the loan pricing is competitive in the current environment, with overall financing costs excluding upfront amortisation costs expected to increase only by 10 basis points (bps) to 2.8% and will lengthen its debt maturity to 4.1 years from 2.8 years currently,” writes Natarajan. “84% of its debt is fixed with every 50 bps increase impacting DPU by around -1%.”
Meanwhile, the REIT is divesting Powers Ferry and Northridge Centre I & II at a price above their latest valuations estimated at a 5%-10% premium. “These two were the smallest assets in its portfolio with a combined value of US$34.6 million, and were underperforming assets thus, we see the transaction as a positive move,” says the analyst.
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The deal is expected to close during this quarter. Gearing post divestment is expected to be around 36%, providing US$100 million-$150 million debt headroom for acquisitions. Management remains on active lookout for acquisitions in key growth markets.
Natarajan observes that overall operating metrics remain positive, with rent reversion for 1HFY2022 standing at up 1.6%. Management noted that 2QFY2022 rent reversions were mainly dragged down by signing off a temporary lease for one of its existing tenants. Excluding this one off, rent reversion for 2Q/1H would be up 4.5%/3.9%.
According to Natarajan, reversions are expected to remain positive in 2HFY2022 in low single digits in light of only 6.3% and 16% of leases due for renewal in 2HFY2022 and FY2023 respectively.
Portfolio occupancy rose 0.3 percentage points q-o-q to 92% despite a slower than expected return to office and market volatility.
To this end, Natarajan has lowered his FY2022-FY2024 DPU estimates by 8%-10% as due to the changing of fees to be fully paid in cash.
Units in KORE closed at 68 US cents on Aug 10.
