1Q2022 Business Update: Spring is coming
- 1Q22 estimated DPU in line, +1% y-o-y and flat q-o-q, mainly from newly acquired assets mid-2021.
- Key positives: i) leasing momentum picking up and more returning to office, ii) expect rental reversions to be around mid-single digit for the year, iii) management is optimistic on Seattle and Austin markets which contributes c.46% of NPI
- Key negatives: i) larger occupancy decline seen in Powers Ferry and The Plaza, ii) utilities inflationary pressure on vacant space but manageable
- Maintain BUY; TP US$0.85. Currently trades at 0.9x P/NAV and c.8.6% FY22F yield
| Key operational data | 1Q2022 | 4Q2021 | %q-o-q | 1Q2021 | % y-o-y |
| Revenue | 37.0 | 36.9 | 0.3% | 34.6 | 6.9% |
| NPI | 21.7 | 20.4 | 6.4% | 20.4 | 6.4% |
| DI | 16.6 | 16.6 | 0.1% | 14.9 | 11.4% |
| DPU (est) | 1.60 | 1.60 | 0.0% | 1.58 | 1.3% |
| Portfolio occupancies | 91.7% | 91.9% | -0.2 ppt | 91.6% | 0.1 ppt |
| Rental reversions (cumulative) | 2.4% | 6.0% | -3.6 ppt | 5.7% | -3.3 ppt |
| WALE (years) | 3.7 | 3.6 | 0.1 | 3.7 | – |
| Gearing (%) | 37.5% | 37.2% | 0.3 ppt | 37.5% | 0 ppt |
| Av cost of debt (%) | 2.9% | 2.8% | 0.1 ppt | 2.8% | 0.1 ppt |
| ICR (x) | 5.0 | 5.1 | (0.1) | 4.8 | 0.2 |
| Leases expiring in FY2022 | 8.7% | 10.3% | -1.6 ppt | 13.0% | -4.3 ppt |
| Leases expiring in FY2023 | 17.0% | 17.0% | 0 ppt | 17.0% | 0 ppt |
Key Observations
Overall occupancy relatively stable due larger decline seen in Powers Ferry and The Plaza; expect mid-single digit full year reversions with positive recovery signs in the office market.
- Portfolio occupancy saw slight decline of 0.2ppt q-o-q to 91.7% mainly due to the large decline seen at Powers Ferry (-16.6 ppt to 68%) and The Plaza (-3.1 ppt to 88.9%).
- Powers Ferry saw a non-renewal of a large tenant (Georgia Banking) and we understand that its rent is c.10% below market. Management has undertaken some AEIs in anticipation of the vacancy and will do some work to pre-lease the space. Atlanta market (Powers Ferry and Northridge Center) contributes c.2.8% of NPI.
- The Plaza saw 2 non-renewals but expect some expansionary demand within existing tenants to backfill some of this space in 2Q2022. Management remains positive on the Seattle / Bellevue market and expect to be able to backfill the space.
- 1Q2022 rental reversions was 2.4%, mainly from Bellevue and Sacramento markets but offset by Houston, Orlando and Atlanda markets. Although reversions are a little lower compared to 2021, management is more optimistic on the recovery for the year and expect full year reversions to be in positive mid-single digit.
- Leasing momentum has picked up slightly in 2Q2022 and management expects a stronger 2H2022. Physical occupancy has creep up to c.55% vs 30% to 40% previously.
- Majority of the buildings have net leases in placed and impact on utility inflationary pressures will be on vacant space which is unlikely to have a major impact on margin squeeze, according to management
- While recovery could still be volatile, management feels optimistic on the Seattle and Austin markets which contributes c.46% of NPI while recovery is underway for the rest of the markets.
KORE currently trades at c.0.9x P/NAV and c.8.6% yield. Maintain BUY; TP of US$0.85.