• Stay BUY with a revised TP of USD0.87 from USD0.92, 26% upside and c.9% yield. Keppel Pacific Oak US REIT’s operational numbers in 2Q were in line with our expectations. Headline DPU declined mainly due to switching off entire management fees in cash, from all units previously. Portfolio occupancy improved slightly during the quarter with positive rent reversions, despite volatile market conditions in the US, underlining strength of its assets. Minimal impact is expected from rising interest rates and inflationary pressures. Valuation remains cheap at 0.84x 2022 P/BV.

• 2Q operational DPU up 1% YoY while final DPU declined 10% YoY on the back of management receiving entire fees in cash instead of units. KORE noted the move is to prevent dilution with its units trading well below NAV as well as to avoid share price pressures from it selling in the market. Management expects fees to be fully paid in cash moving forward. In July, KORE also entered into a new USD180m loan facility to refinance early its loans maturing in Nov 2023 and Jan 2024 which should remove any financing requirements until Nov 2024. The loan pricing is competitive in the current environment in our view, with overall financing costs (excluding upfront amortisation costs) expected to increase only by 10bps to 2.8% and will lengthen its debt maturity to 4.1 years (from 2.8 years currently). 84% of its debt is fixed with every 50bps increase impacting DPU by c.-1%.

• Divesting Powers Ferry and Northridge Center I & II at a price above their latest valuations (estimated 5-10% premium, exit cap rates mid 6%). These two were the smallest assets in its portfolio with a combined value of USD34.6m, and were underperforming assets thus, we see the transaction as a positive move. The deal is expected to close during this quarter. Gearing post divestment is expected to be c.36%, providing USD100-150m debt headroom for acquisitions. Management remains on active lookout for acquisitions in key growth markets.

• Operating metrics remain positive. Rent reversion (1H) stood at +1.6% (1Q: +2.4%). Management noted that 2Q rent reversions were mainly dragged down by signing off a temporary lease for one of its existing tenants. Excluding this one off, rent reversion for 2Q/1H would be +4.5%/3.9%. Reversions are expected to remain positive in 2H in low single digits. It only has 6.3%/16% of leases due for renewal in 2H/FY23. Portfolio occupancy rose 0.3ppt QoQ to 92% despite a slower than expected return to office and market volatility.

• We lower our FY22-24F DPU 8-10% by changing fees to be fully paid in cash. 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 apply a 0% premium to our DDM-derived TP.

Source: RHB Research - 28 Jul 2022