A star is born!
Optimistic recovery trends
Overall occupancy relatively stable though 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 a slight decline of 0.2ppt q-o-q to 91.7%, mainly due to the large declines 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. The Atlanta market (Powers Ferry and Northridge Centre) contributes c.2.8% of NPI.
- The Plaza saw two non-renewals but expects some expansionary demand from existing tenants to backfill some of this space in 2Q2022. Management remains positive about the Seattle/Bellevue market and expects to be able to backfill the space.
- 1Q2022 rental reversions were +2.4%, mainly from the Bellevue and Sacramento markets, but were offset by the Houston, Orlando, and Atlanta markets. Although reversions are a little lower compared to 2021, management is more optimistic about the recovery for the year and expects full-year reversions to be a positive mid-single digit.
- Leasing momentum has picked up slightly in 2Q2022 and management expects a stronger 2H2022. Physical occupancy has crept up to c.55%, vs. 30% to 40% previously.
- Majority of the buildings have net leases in place, and the impact of utility inflationary pressures will be on vacant space only, which is unlikely to have a major impact on margin squeeze, according to management.
- While recovery could still be volatile, management feels optimistic about the Seattle and Austin markets, which contribute c.46% of NPI, while recovery is underway for the rest of the markets.
Maintain BUY; marginally raised TP to US$0.86. We maintain our BUY rating and marginally raise our TP to US$0.86, vs. US$0.85 previously. We incorporate a higher risk-free rate of 3.5%, vs. 2.5% previously, but we roll forward our DCF valuation to FY23F. We lowered our FY22F-FY23F DPU estimates marginally by c.2% to incorporate some delay in recovery.
Despite an uneven US office market recovery, we believe KORE stands to benefit, as its submarkets are more stable and displaying a strong positive recovery outlook; it also contributes c.82% of NPI, the highest among its peers.