Analysts from DBS Group Research and UOB Kay Hian have increased their target prices on Keppel Pacific Oak US REIT (KORE) while keeping their respective “hold” and “buy” calls.
For the FY2024 ended Dec 31, 2024, KORE’s distributable income fell by 8.8% y-o-y to US$47.6 million ($64.3 million).
DBS analysts Derek Tan and Dale Lai have upped their target price to 28 US cents (38 cents) as they see “green shoots emerging” with stronger leasing velocity and rising occupancy rates. The new target price is due to a higher P/B peg of 0.4 times.
As at Dec 31, 2024, KORE’s portfolio occupancy rate stood at 90%, up from 88.7% a quarter ago, which is “commendable”, note Tan and Lai.
Furthermore, with more companies in the US asking its employees to go back to the office full time, the analysts believe space consolidation risks are expected to ease in the coming year, thus benefiting KORE.
Although the REIT manager says there are known expiries and vacancies coming up, it remains proactive in leasing to build up its cash flows.
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Despite the higher target price estimate, Tan and Lai have lowered their distribution forecasts in FY2025 and FY2026.
“We have aligned our margin assumptions to FY2024 levels and assumed longer vacancy periods for Plaza and Westmoor in FY2025 on top of a slight uptick in interest rates (4.6% versus 4.5% previously),” the analysts write in their Feb 6 report.
“While the focus is on potential dividend resumption in FY2026, we believe a sustainable payout should be pegged to adjusted free cash flows,” they add.
With the payout estimated at around 40% of KORE’s overall distributable income, the analysts believe this should result in a distribution per unit (DPU) of 1.7 US cents and a yield of 7.1% for FY2026.
The estimates may be tweaked after there is more clarity on the manager’s capex requirements
While the analysts believe the “worst is over” for KORE, the year-long wait for DPUs to resume could delay buying interest, thereby keeping KORE’s unit price trading sideways for now, the analysts note.
UOB Kay Hian analyst Jonathan Koh has also given the REIT a higher target price of 33 US cents from 32 US cents previously after the REIT's FY2024 distributable income came in line with expectations.
In his Feb 5 report, he notes that the lower gross revenue and NPI were due to higher repair and maintenance expenses, although the REIT saw an improvement in portfolio occupancy of 90% in the 4QFY2024 and a turnaround in rental reversions.
Other factors highlighted include the US federal government's call for employees to return to a five-day work week. With this, the private sector may follow suit. The successful implementation of the return to office model by large corporations such as Amazon, JPMorgan and AT&T may also pave the way for other companies to do likewise, Koh writes.
On the back of this trend, KORE may benefit from the recovery stemming from the work-from-office momentum with demand for office space. After all, companies, which have downsized prematurely before, would now need additional office space to accommodate more employees returning to the office, Koh adds.
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KORE is also tipped to benefit from trends such as the interstate migration towards the Sun Belt states such as Texas, North Carolina, South Carolina, Florida and Tennessee. Growth cities in the Sun Belt states accounted for 38.2% of KORE's NPI as at Dec 31, 2024. These markets also led the recovery with leasing activities reaching 95% of pre-pandemic levels in the 2HFY2024. KORE is also seeing recoveries taking place in gateway markets with leasing activities at 76% of pre-pandemic levels.
Moving forward, the REIT expects its portfolio occupancy to remain above the industry average despite known vacates at Westmoor Center in Denver (100,000 sq ft) and The Plaza Buildings in Bellevue (40,000 sq ft) in 2025. Due to the vacancies, however, Koh expects KORE's portfolio occupancy to take a "small dip" in 1QFY2025 before recovering back to 88%-89% by end-2025.
"Management expects rental reversion to range from -5% to +5% in FY2025," he writes.
KORE's manager also expects its physical occupancy rate to improve to a normalised level of 70%-80% in 2025; its physical occupancy was 72% in the 4QFY2024, which reflects the hybrid arrangements of an average 3.5 days spent in the office per week.
Despite the higher target price, Koh has trimmed his distribution per unit (DPU) forecast for FY2026 and FY2027 by 4% as he expects a lower NPI margin in both years.
Based on his estimates, KORE provides an FY2026 distribution yield of 15.6% and trades at a price to net asset value (P/NAV) of 0.35 times, which is a 65% discount to its NAV per unit of 69 US cents.
As at 3.07pm, units in KORE are trading flat at 24 US cents.
