SINGAPORE (Apr 14): While several of Singapore’s Real Estate Investment Trusts (S-REITs) are feeling the heat of movement control orders, RHB Group Research is optimistic that Keppel Pacific Oak US REIT (KORE) can stand the test of the ongoing Covid-19 pandemic.

“Covid-19’s impact on KORE’s office portfolio is mitigated by a diversified asset/tenant base and a reasonably long portfolio weighted average lease to expiry (WALE) of more than 4 years,” says analyst Vijay Natarajan in an April 13 report.

“While office demand is expected to take a near-term hit, we expect demand in tech markets – to which KORE has most exposure – to hold up relatively well,” he adds.

So far, KORE’s management shares that its retail segment – mainly cafes in office buildings – have been the worst hit following low footfall as employees work from home. But this is expected to have marginal impact on the REIT since it constitutes less than 1% of KORE’s overall income.

The bulk of its income comes from heavyweight office tenants. And while it has yet to receive rent rebate requests, KORE says it is bracing itself to start receiving some in the coming months.

Such requests will be evaluated on a case-by-case basis. “[KORE] may work with some tenants to provide rent relief to maintain long-term relationships and avoid bankruptcies,” notes Natarajan.

However, with only 7% of leases by rental income up for renewal in FY20 – of which most was done in February – Natarajan expects rent to face some pressure.

Even so, he says KORE has some leeway to lower rent, as its expiring rent prior to the Covid-19 outbreak was 10-15% below market rates on average.

KORE has 13 office properties scattered across the US, giving it a total net lettable area (NLA) of 4.7 million sq ft and a net property value of US$1.26 billion ($1.78 billion). These properties house over 460 tenants, several of whom are in the growth sectors of technology and healthcare.

Healthy financials

FY2019 ended Dec 31 saw KORE posting a distributable per unit (DPU) of 6.01 US cents, 26% higher than the 4.77 US cents forecast. This was also 31.2% higher than the 4.58 US cents logged in FY18.

Consequently, income available for distribution surged 31.4% to US$50.8 million, from the US38.6 million handed out in FY18. Meanwhile, as at end December, cash and cash equivalents stood at US$38.2 million.

FY19 saw KORE attaining positive portfolio rental reversion of 14.3% on the back of sustained rent increases. This was driven by positive office demand as well as an expansion of its tenant base in its Seattle and Austin properties.

This brought WALE by cash rental income for KORE’s portfolio and top 10 tenants to 4.2 years and 5.6 years respectively.

In its outlook statement, KORE said it would continue to leverage on its strategic exposure to fast-expanding tech hubs and its unique value proposition of offering office towers and business campus-style properties that are in demand.

To this end, Natarajan is optimistic of the company’s ability to execute its plans, since it has revolving credit facilities to finance its small portions of debt.

He also expects the company to reap tax savings of 1.5% following its recent adoption of tax regulations, similar to the one in place during its listing.

Even so, Natarajan has loured his FY20F-22F DPU to 3-5% on the back of some vacancies and possibilities of lower rent. However, he has maintained his ‘buy’ call on the stock at a target price of US 76 cents.

As at 11.45am, KORE was up 3 US cents, or 5.6%, to 57 US cents.