Keppel Pacific Oak US REIT’s (KORE) results for 1HFY2024 ended June 30 were “broadly in line” with RHB Bank Singapore’s forecast, with occupancy improvements and early refinancing of loans expiring in 4QFY2024 and FY2025.
These steps have “substantially de-risked” KORE’s profile, says RHB analyst Vijay Natarajan. “Management continues to adopt a prudent stance with the likelihood of early resumption of distributions (before 2026) only upon potential divestment.”
In a July 31 note, Natarajan is staying “buy” on KORE with an unchanged target price of 29 US cents (38.73 cents), which represents a 43% upside from its current share price of 20 US cents. “KORE’s share price has staged a good recovery recently, and we see some near-term volatility before the next leg of recovery upon commencement of rate cuts.”
KORE’s portfolio occupancy rose 0.4 percentage points (ppts) q-o-q to 90.7% as at June 30, with occupancy improvements seen at the One Twenty Five, Iron Point and The Westpark.
The US office REIT’s leasing demand strengthened in 1HFY2024, with 11% of net lettable area (NLA) signed. Demand came from diverse segments, which includes insurance, consulting and healthcare.
Around 7% of leases by rental income are due for renewal in 2HFY2024, with some being known to vacate in 4QFY2024.
Management expects this to be backfilled, although there is likely to be a transition period, says Natarajan.
KORE expects occupancy by the end of 2024 to be at 86% and 88% levels. Rent reversion swung back into the black in 2QFY2024 at positive 1.2% from negative 1.4% in 1QFY2024.
Debt profile
KORE has a refinanced the bulk of loans expiring over the next two years. Of the US$75 million in loans due for renewal in 4Q, KORE has refinanced USD30 million for a three-year term, USD25 million has been extended for a year and management is in discussions for the remaining USD20 million.
KORE has also secured a one-year extension for USD115 million in loans expiring in August 2025 and is engaging with the banks for the remaining USD40 million due next year.
The revised all-in average cost of debt came in better than expectations at 4.56% per annum compared to an estimated 4.75% per annum. Natarajan notes that this is currently at 4.47% per annum, with management noting a 20 to 30 basis point expansion in margins for new loans.
Distributions still suspended
KORE’s manager has halted distributions since the release of its FY2023 results in February after a decline in portfolio valuation. Distributions to unitholders are slated to be suspended until Dec 31, 2025.
Natarajan notes cautious guidance on early resumption of distribution payments with management stating that any early dividend payments before 2026 will hinge on KORE’s ability to divest assets.
The analyst thinks this is likely to be Iron Point and 1800 West Loop. This would bring gearing lower and provide a comfortable debt cushion, he adds.
KORE’s current plan is to remain focused on the efficient deployment of withheld distribution on improving its core assets, which will improve leasing prospects in competitive markets and maintain long-term asset value.
As at 1.10pm, units in KORE are trading flat at 20 US cents.
