• Keep BUY with unchanged TP of USD0.92, 23% upside and c.9% yield. Keppel Pacific Oak delivered another solid quarter with distributable income up 11% YoY and an estimated DPU of 1.6 cents (+1% YoY), in line with our expectations. Management forecasts leasing velocity to improve in coming quarters with mid-single-digit positive rent reversions expected. Minimal impact is expected from rising inflation and utility costs with majority being net leases. Valuation remains compelling at 0.9x P/BV vs sector’s 1.1x.

• Slight dip in portfolio occupancy but expected to rebound in coming quarters. Overall occupancy dipped 0.2ppt to 91.7% mainly due to the departure of tenants at Powers Ferry, Atlanta (67.6%, -16.6ppt) and The Plaza buildings (88.9%, -3.1ppt). This was partially offset by higher occupancies at Iron Point (90.6%, +3.2ppt) and One Twenty Five. Management is in discussions with prospective tenants and is confident of backfilling it in coming quarters which should push occupancy higher. Leasing momentum slowed slightly to c.147k sqft (-41% QoQ) but this is expected to improve with more employees returning back to offices. Physical occupancy of its assets has been increasing at c.55%.

• Rents still on a growing trend. While rent reversion slightly slowed to +2.4% (FY21 +6%) KORE noted it was mainly due to a combination of markets in which leases expired this quarter. With market rents on a rising trend since 3Q21 and in place rents c.8.9% below asking rents, we expect full year rental reversion to be in positive mid-single digits.

• On active lookout for acquisitions and divestment opportunities. Gearing is at 37.5% which offers a potential debt headroom to acquire assets of USD100-200m this year in our view. Cap rates in its existing markets are still holding up at 5.5-7.5%. Management remains open to divesting some of its smaller assets (potentially Atlanta assets) and recycle capital. On The Plaza redevelopment - where plans are underway to build a multifamily asset on top of existing parking garage - it is currently working with authorities on clearing regulatory hurdles and will prove further updates by next two quarters.

• Minimal impact from rising rates and utilities. As majority of KORE’s leases are on net basis, (ie utility and other charges are recovered back) no significant impact is expected except for slightly higher costs on vacant spaces. Its strategy of signing shorter leases also puts it in a good position to negotiate higher rents upon expiry. 84% of its debt is hedged and every 50bps increase in rates will have a 1% impact to its DPU.

• No changes to our estimates. Based on our proprietary ESG model KORE has a score 3.0 (out of 4.0). As this score is in line with country median we have not applied any premium/discount to our DDM-derived TP.

Source: RHB Research - 20 Apr 2022