• Stay BUY, new USD0.56 TP from USD0.64, 5% upside with c.16% FY23F yield. Keppel Pacific Oak US REIT’s 1H23 results are broadly in line with expectations. Its operational performance still holds up well against the broad market challenges faced by the US commercial sector, thereby emphasising the REIT’s differentiated portfolio merits. Its gearing remains well below official limits – while there are downside risks to valuations, we do not expect a >10% decline by year-end at this juncture. No loan refinancing is due until 4Q24, and all assets remain unsecured

• Adjusted DPU for 1H23 declined 12.6% YoY mainly from higher interest costs, while overall DPU fell by 17.2% YoY on the effect of management fees being fully paid in cash (1Q22: 100% in units). No revaluations were conducted for 1H23, but based on its assessment and discussions with valuers in its markets, KORE does not see a material decline at this juncture. Also, its loan covenants are tied to official gearing limits, ie gearing threshold of 50% and interest cover of 2.5x. As such, valuations need to fall by 24% to breach this limit. In terms of debt profile, 78% of its debt is hedged using interest rate swaps with maturities mostly tied closer to loan expiries.

• Portfolio occupancy dipped by 1.1ppt QoQ to 90.8%, mainly on lower occupancy across all three Seattle assets. While there have been some tenant movements in Seattle, KORE is in active discussions to backfill some of these vacancies. Its largest asset, The Plaza, should see some near-term occupancy rate pressure. However, overall, KORE guided that it targets to maintain a portfolio occupancy rate of c.90% by end-2023. Leasing activity was muted in 2Q at c.70k sqf(1Q: 219k sqf), but is expected to improve in tandem with the slightly better economic outlook and improvement in the rate of workers returning to the office. Physical occupancy rates (ie return to office) across its portfolio improved slightly to 65%, from 64% in the previous quarter. 1H23 rental reversion was at -4.6%, skewed by one large renewal/expansion lease at Maitland Promenade I & II – excluding this detail, it would have been +4%. The REIT’s management guided for rental reversions to stay positive, and in the low single digits in 2H23.

• KORE’s modest gearing of 38.4% provides it with some buffer against a decline in valuation in these uncertain market conditions. As such, a 10- 15% decline in its valuation would still keep its gearing at 42-45%. The lack of tenant concentration risks – since its top 10 tenants account for only 23.7% of income, and no tenant accounts for over 3.5% of income – limits vacancy and cash flow risks.

• We trim FY23-24F DPU by 6% and 7% post tightening occupancy rate assumptions and assuming higher financing costs. KORE’s ESG score of 3.1 (out of 4) is a notch above the country median score, so we applied a 2% ESG premium to its intrinsic value to derive our TP.

Source: RHB Research - 27 Jul 2023