• BUY, new TP of USD0.29 from USD0.48, 89% upside. Keppel Pacific Oak US REIT’s shock announcement of suspending distributions resulted in a steep 40% fall in share price yesterday. We see this dividend payment cut as a short-term pain in order to better preserve long-term value, especially with resilient operational income. The knee-jerk share price correction is overdone, in our view, and we expect value-driven investors to enter once the dust settles, with KORE trading at 0.2x FY24F P/BV.

• Distributions to be used to fund capex in order to maximise NPI. KORE will suspend distributions starting from 2H23 until 2H25. The withheld amount would be primarily used to fund its planned capex of USD60m in FY24 and USD50m for FY25. The capex would be spent across assets in order to provide the right amenities, create speculative office suits for which there is good demand, as well as improve overall asset positioning. While various options to raise capital such as raising equity, divestments or securing new debt were considered, none were feasible due to the current challenging market conditions. Management remains open to the above options should these arise in future – which may lead to the early resumption of divdend payments. KORE’s strategy in the current market is to continue to reinvest strategically, to stay relevant to current and prospective tenants.

• Portfolio valuation declined by a more modest c.7% in FY23 (our estimate: 10% decrease). The lower decline in our view was a result of its above strategy of continuing to invest in the right assets as well as its active leasing efforts. We believe the US office market is at the tail-end of an asset devaluation cycle, with interest rates peaking. Gearing has risen to 43.2%, but remains well within the 45% limit. KORE will also consider divesting Iron Point and 1800 West Loop South (deemed as non-core assets) should market conditions bounce back, in order to de-lever and recycle capital. c.USD75m of its loans (majority on floating interest ratse) are expiring in 4Q24. Based on recent talks with lenders, it expects this to be refinanced. Interest cost for FY24 is expected slightly higher at ~4.3% (FY23:4.1%).

• Portfolio occupancy rate expected to stay resilient, with the overall occupancy rate at 90.3% (3Q23: 91.4%). About 10% of leases by rental income are due for renewal this year, with the majority coming from Seattle assets. Management expects its overall portfolio occupancy rate to stay above 88% by the end of the year. Rental reversions are expected to be flattish to slight negative. Overall, we remain fairly confident on KORE’s operational income generation potential.

• Our TP is pegged to 0.4x FY24F P/BV (vs DDM methodology), which buffers a further 30% decline in asset valuation. KORE’s ESG score of 3.1 is at par with the country median, so we apply a 0% ESG premium/discount.

Source: RHB Research - 16 Feb 2024