“Its portfolio continues to benefit from its choice submarkets (Sun Belt cities) and well-diversified tenant base with limited concentration risks. Rising interest rates impact on financing costs is also well mitigated with no debt maturing until end 2024 and 77% of its debt hedged,” Natarajan adds. He has revised his target price to 74 US cents ($1.04) from 87 US cents previously, representing a 37% upside.
KORE achieved positive rental reversion of 5.3% for 3QFY2022, driven by The Plaza Building and The Westpark Portfolio at Seattle as well as Bellaire Park in Houston, says UOBKH analyst Jonathan Koh. Inplace passing rents remain 5% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion.
The REIT also continues to benefit from built-in annual rental escalation of 2.5% across its portfolio, Koh adds. Koh’s target price has been trimmed to 74 US cents from 80 US cents previously.
Portfolio occupancy saw a slight improvement of 0.5 percentage points q-o-q to 92.5%, excluding the divested Northridge Centre. Excluding Powers Ferry, which is slated to be divested, portfolio occupancy would have been 93.2%, DBS analysts Rachel Tan and Derek Tan point out.
“Despite the numbers looking more stable this quarter, management expects the office market to remain volatile possibly until end-2023, as US companies continue to rationalise and right-size their office space as previously long leases come due. The percentage of downsizing varies, ranging from 20% to as high as 100%,” they add. DBS’s target price for KORE stood at 65 US cents from 78 US cents previously.
KORE completed the divestment of Northbridge Center I & II in Atlanta, Georgia for US$22.1 million in July. Koh expects KORE to recognise a small divestment gain of US$1.6 million in 3QFY2022. The REIT has also signed a sale and purchase agreement to divest Powers Ferry in the city.
In aggregate, Northbridge Center I & II and Powers Ferry contribute 2.7% of the group’s net property income as of June. Proceeds from the divestment of Northbridge Center I & II and Powers Ferry could be utilised for reinvesting in office properties in growth markets, or share buyback, Koh highlights.
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To factor in higher interest cost, DBS has revised its FY2022-FY2024 DPU estimates by 2%-8% while RHB’s Natarajan has lowered his FY2023-FY2024 DPU estimates by 3%.
“While the US office market remains volatile, KORE has kept its portfolio relatively stable. Currently, it is trading at 0.7x P/B, offering FY2023 yield of 10%, an attractive level to monitor as we await a potential recovery in the US office market,” the analysts add.
Meanwhile, UOBKH’s Koh has cut his DPU forecast by 8% for 2023 and 7% for 2024 due to the REIT’s change in policy to pay 100% of management fees in cash starting 2QFY2022.
As at 12.24pm, units in KORE is trading 2.5 US cents higher or 4.58% up at 57 US cents.
