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RHB maintains 'buy' on KORE on the back of US office recovery

Khairani Afifi Noordin
Khairani Afifi Noordin • 3 min read
RHB maintains 'buy' on KORE on the back of US office recovery
RHB Group Research’s Vijay Natarajan has maintained his “buy” rating on KORE with a target price of 90 US cents.
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RHB Group Research’s Vijay Natarajan has maintained his “buy” rating on Keppel Pacific Oak US REIT (KORE) with a target price of 90 US cents, citing US office recovery.

“Although there has been a slight delay in [the] timeline, more employees are expected to return to the office in the US in early 2022, boosting leasing demand and acting as a re-rating catalyst,” says Natarajan.

Last month, KORE completed the acquisition of Bridge Crossing (BC) in Nashville and 105 Edgeview (105 EV) in Denver for a total consideration of US$105.1 million.

The buildings were acquired at pro forma net property income (NPI) yields of 7.8% and 6.7% respectively, says Natarajan. These are yield-accretive acquisitions at 0.8%, based on a 60:40 equity to debt funding mix.

See also: UOB Kay Hian initiates 'buy' on KORE with TP of US$1.10

Natarajan highlights that the assets are in the upcoming US growth markets, largely occupied by tech tenants. Payment processing company Comdata, for example, occupies 93% of net leasable area in BC, while inflight internet and entertainment provider Gogo Business Aviation occupies 66% of 105 EV.

With this acquisition, the tech sector will account for the biggest portion of KORE’s cash rental income at 31.2%. BC and 105 EV also have a long weighted average lease expiry of 6.6 years and 5.7 years respectively, with no leases expiring until 2023 and a built-in annual rental rate escalation of 2.7%.

After its equity fund-raising exercise to acquire the two assets, KORE’s gearing level is still modest at around 37%. Natarajan says KORE has US$100 million to US$200 million of debt headroom for further acquisitions, assuming comfortable gearing levels of 40% to 45%.

“We believe it could acquire one to two assets in the next six to 12 months in key growth cities in the US, like Salt Lake City, Nashville, Charlotte and Phoenix,” says Natajaran.

He notes that KORE has begun its preliminary studies involving a new five-storey multi-family building at The Plaza in Washington, intended to be constructed atop the site’s existing parking garage.

RHB Group Research expects a potential capex outlay of about US$100 million for this project, with potentially double digit returns. “More details on the proposed development are expected in the coming quarters, which should be a positive catalyst against a backdrop of current strong demand for mult-ifamily assets in the US,” says Natarajan.

While KORE’s portfolio occupancy rate has declined to 90.5% since early 2020, rental growth has been positive at 5% to 15%, underscoring its under-rented portfolio, says Natarajan.

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He adds that the REIT was also recently included in the FTSE EPRA Nareit Global Developed Index, which should enhance its trading liquidity and visibility, as well as narrow the valuation gap versus its peers.

As at 1.42pm, units in KORE are up 0.01 US cents or 1.29% higher at 78.5 US cents.

Photo: KORE

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