DBS: Keppel Pacific Oak US REIT – Buy Target Price US$0.48

2Q2023 Results Analysis: Holding out against challenges

• 1H23 DPU -17% y-o-y to 2.50 UScts, above our conservative estimates, in line with consensus. On a like-for-like basis (excl. conversion of management fees to cash), 1H23 DPU fell 13% y-o-y / flat q-o-q, mainly due to divestments and higher interest costs
• Key positives: i) portfolio occupancy held above 90%, ii) positive reversions excluding Spectrum lease renewal / expansion, iii) gearing remained below 40% with 24% buffer for asset valuation decline
• Key data to watch: i) portfolio occupancy decline slightly with larger decline from key assets in Seattle, ii) some lease expirations in FY24
• Portfolio more resilient compared to peers. Maintain BUY; TP US$0.48. Currently trades at 0.4x P/NAV and c.15% FY23F yield

What happened?

Stable q-o-q performance with slight decline in occupancy (maintain above 90%) and slower leasing velocity in 2Q23; expect sentiment to pickup with more clarity in economic and interest rates outlook. 1H23 DPU fell 17% to 2.5 UScts, above our conservative estimates, mainly due to the conversion of management fees paid in units to cash from 3Q22 onwards. On a like-for-like basis (adjusting 1H22), 1H23 estimated DPU fell 13% y-o-y, partially from divestments of 2 assets and higher interest cost. 2Q23 DPU was flat q-o-q at 1.25 UScts. 

Gearing and average cost of debt was relatively stable q-o-q at 38.4% and c.4% respectively. Portfolio occupancy trended down slightly to 90.8% from 91.9% in 1Q23. Larger occupancy in the quarter were seen at all 3 Seattle assets with Bellevue Tech Centre recorded highest decline of 6ppt q-o-q following the tenant, Terra Power, moved from its temporary space to its permanent space in the asset. The tenant is looking to expand further in the asset and as such management remains confident of the Bellevue Tech Centre and Westpark assets. 

2Q23 rental reversions were +2% vs +4.9% in 1Q23 (ex-Spectrum leases). Management expects FY23 reversion to remain at positive low single digit. In 2Q23, leasing velocity has slowed with only 70k sqft of leases completed, close to the average of low volume per quarter during the pandemic in 2020. This was mainly due to the uncertain economic and interest rates outlook. Management expects leasing interests to pickup again with more clarity. Recent expectations of soft landing and revision of global economic growth upwards would bode well and improve sentiment further.  

Our view

KORE’s portfolio more resilient to weather through the headwinds; maintain BUY; TP of US$0.48. Despite operations moderated slightly in 2Q23, we believe that KORE’s portfolio is relatively more resilient compared to its peers as it weather through the headwinds. Based on KORE’s valuers, its portfolio valuation should remain relatively stable with minor decline in mid-year vs the last valuation in Dec22. There’s sufficient gearing buffer (24% decline in valuation) before gearing will hit 50%. We maintain our BUY rating and TP of US$0.48. We continue to monitor re-rating catalysts and expect the stabilisation of interest rates will help to improve sentiment. 

Source: Company, DBS