1Q22: Benefitting From In-migration And Growth In Magnet Cities
Growth in NPI of 6.7% yoy in 1Q22 was attributed to the acquisition of Bridge Crossing
in Nashville and 105 Edgeview in Denver, which was completed on 20 Aug 21. KORE
provides a unique exposure to in-migration and growth in magnet cities. Growth in
rents for growth markets has increased 1.2% in the past 12 months and is projected to
increase 3.4% in the next 12 months. KORE provides attractive 2022 distribution yield
of 8.4% and P/NAV of 0.94x. Maintain BUY with a lower target price of US$1.07.
RESULTS
• Keppel Pacific Oak US REIT (KORE) reported distributable income of US$16.6m (+10.9%
yoy) for 1Q22, which is in line with our expectations.
• Growth boosted by two newly-acquired properties. Gross revenue and NPI grew 6.9%
and 6.7% yoy respectively in 1Q22. The better performance is attributed to the acquisition of
Bridge Crossing in Nashville and 105 Edgeview in Denver, which was completed on 20 Aug
21.
• Magnet cities provide organic growth. KORE achieved positive rental reversion of 2.4%
for 1Q22 (2021: 6.0%) driven by properties located in Seattle – Bellevue/Redmond and
Sacramento. KORE signed leases for 146,768sf of office space in 1Q22 (2021: 730,619sf),
of which 47% are renewals and 21.1% are expansions. Professional services, finance &
insurance and technology, advertising, media & information (TAMI) accounted for 41.3%,
33.4% and 6.3% of new leasing demand and expansions respectively.
• Management expects to maintain positive rental reversion at mid-single-digits in 2022 as in-place rents are 8.9% below asking rents. Growth of KORE’s portfolio is further supported by
built-in average annual rental escalation of 2.4%.
• Occupancy rate likely to have bottomed. Portfolio occupancy was stable at 91.7% in
1Q22. Occupancy at Iron Point in Sacramento improved 3.2ppt qoq to 90.6% after securing
real estate broker Keller Williams as the new tenant. Occupancy at One Twenty Five in
Dallas improved 3.4ppt qoq to 94.0% after securing United Capital Advisors (subsidiary of
Goldman Sachs Personal Financial Management). Newly-acquired Bridge Crossing at
Nashville and 105 Edgeview in Denver were fully occupied.
• Healthy balance sheet. Aggregate leverage was stable at 37.5% and well within the
regulatory limit of 50%. All-in average cost of debt has increased 0.13ppt to 2.93%. 84.2% of
KORE’s borrowings are hedged into fixed interest rates. Management estimated that every
50bp increase in LIBOR/SOFR reduce DPU per year by 0.062 US cents. Assuming that the
Fed Funds Rate averages 2.5% in 2023, we estimate that average cost of debt will increase
to 3.18%. KORE has no long-term refinancing until Nov 23.
STOCK IMPACT
• Rents in magnet cities started to increase. According to CoStar Office Report, average
growth in rents for growth markets over the past 12 months was 1.2% as of Apr 22. Notable
increases were seen at Sacramento, Folsom +1.7%, Seattle – Eastside Bellevue +2.6%,
Seattle – Redmond +2.6%, Orlando, Maitland +3.0% and Austin, Northwest +2.4%. Average
growth in rents over the next 12 months is projected to be 3.4%.
• Continue to invest in growth from magnet cities. KORE has presence in six out of the 20
fastest growing states in the US. Management continues to scout for opportunities to invest in
growth markets, such as Phoenix in Arizona, Raleigh and Durham in North Carolina, Salt
Lake City in Utah, San Antonio in Texas and Tampa and Miami in Florida. Many companies
adopt the hub-and-spoke model where they retain their main office in gateway cities but open
smaller satellite offices in key growth markets.
• Employees returning to their offices. Sunbelts markets have outperformed gateway cities
in workplace occupancy. Austin, Houston and Dallas in Texas have registered high
workplace occupancy at 62.4%, 56.3% and 51.8% respectively.
• Asset enhancement for The Plaza Buildings. KORE has hired Pastakia + Associates for
permitting and entitlement work on a new five-storey multi-family building in downtown
Bellevue atop an existing six-storey car park, which is part of KORE’s The Plaza Buildings.
The site is in close proximity to Bellevue Square and downtown Bellevue 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.
EARNINGS REVISION/RISK
• We trimmed our 2023 DPU forecast by 3% due to higher average cost of debt.
VALUATION/RECOMMENDATION
• Unique value proposition of growth and yield. KORE provides an attractive 2022
distribution yield of 8.4%. The stock trades at P/NAV of 0.94x.
• Maintain BUY with a lower target price of US$1.07, based on DDM (cost of equity: 7.0%,
terminal growth: 1.5%).
SHARE PRICE CATALYST
• Growth from Super Sun Belt and 18-hour cities driven by in-migration.
• Growth from continued positive rental reversion.