• Stay BUY with revised DDM-derived USD0.69 TP from USD0.74, 27% upside. Keppel Pacific Oak US REIT’s results were slightly below (96% of forecast), while valuations surprised on the upside. Operational numbers remained strong despite very challenging office market conditions – we attribute this to assets in right markets and a strong leasing team. Gearing remains comfortable at below 40%. YTD, KORE’s share price has bounced back c.19%, but remains cheap at 30% below book and offers 10% yield.

• 4Q adjusted NPI down 6% QoQ due to lower income from assets divested during the quarter and higher repair and maintenance expenses. Adjusted DPU (2H) was 2.8% lower YoY as higher revenue was offset by an increase in interest and property expenses. Overall portfolio value surprised on the upside, coming in relatively flat (+0.2% YoY) on an absolute basis, but declined 2.7% when including capex and tenant improvements. In comparison, its peer Manulife US REIT (MUST SP, BUY, TP: USD0.43) earlier announced a 11% valuation decline. This again differentiates a relatively positive outlook on KORE’s submarket and its limited tenant concentration risks.

• Outlook moderated but still positive. Rent reversions are expected to remain in positive low single digits (FY22: 3.8%, 4Q: 8.1%) with asking rents still c.6% below average in place rents. Despite uncertainty and negative news flows from the tech sector, its overall portfolio occupancy remained flat QoQ at 92.6%. For FY23, while some fluctuations in occupancy are anticipated from known tenant exits, it remains in active discussion with various prospects and confident of maintaining its high occupancy levels with demand staying relatively firm for smaller leases. The impact from big tech layoffs and cutbacks is not expected to be significant in its Seattle and Sacramento submarkets and overall portfolio as such. Physical occupancy in its assets have instead seen an improvement from market cool-off and is currently at c.60%, which it sees as positive.

• Strong balance sheet with 77% of its debt hedged and no debt maturing until 4Q24. Every 50bps rate increase should have a c.1.2% DPU impact.

• Acquisitions not the focus, as it sees limited opportunities in the market currently and its high cost of capital limits any accretion potential. Overall gearing is comfortable at 37.5%. It has earmarked two assets in its portfolio which it could potentially divest at the right price.

• We have lowered FY23-24F DPU by 5-6% by tweaking our occupancy assumptions, with higher interest costs. ESG score of 3.0 (out of 4.0) is in line with country median, and we applied a 0% premium/discount to our DDM-derived TP.

Source: RHB Research - 2 Feb 2023