• Keep BUY, with unchanged USD0.29 TP and 104% upside. Keppel Pacific Oak US REIT posted another stable quarter of operational and financial metrics that met expectations. Portfolio occupancy remains stable at c.90% – expected to be maintained despite some tenant vacates at the end of the year. KORE is in active discussions with banks on refinancing loan expiries for FY24-25, and we expect a positive outcome by 2Q or 3Q due to its stable income profile and manageable gearing. The REIT currently trades at distressed 0.2x PB.

• Healthy leasing momentum in 1Q, with 335,437 sq ft of leases signed in 1Q24 (c.48% of total FY23) or c.7% of portfolio NLA. The majority of it came from proactive renewal of leases for 2025 and later (c.49%) while new and expansion leases accounted for c.36% of leasing demand. Technology, advertising, media and information (TAMI), and professional services sector remain the key drivers of new and expansionary demand. Portfolio occupancy (1Q) as a result remains stable at 90.1% (-0.2ppt QoQ). Looking ahead, management highlighted that The Plaza building will be its key leasing focus in 2H24 and 2025, with 28% and 14% of leases expiring. While some of these are known vacates, KORE continues to see good demand for this asset, in particular for smaller spaces (5,000 – 10,000 sq ft). Overall, management remains confident of maintaning its earlier guidance of keeping portfolio occupancy of more than 88% by end-2024. Physical occupancy at its assets continues to creep up, currently at c.68% (+1ppt QoQ), with the remote hiring trend showing a steady decline in the US (Figure 2).

• Rent reversion was at -1.4% (FY23: -1.8%), mainly due to renewals at Bellevue Technology Center and Westmoor where the existing tenant rent, including annual escalations, moved up ahead of market rent growth. We expect the full-year rent reversion to be flattish to slight negative. Capex guidance remains unchanged at USD60m for FY24.

• 1Q24 distributable income down 9% YoY, 8% QoQ mainly from higher financing costs rising 15% YoY while adjusted net proprety income remained stable. All-in financing costs (1Q24) stood at 4.46% pa (+34bps QoQ) and we expect it to be c.4.6-4.7% for FY24. C.69% of KORE’s debt is hedged through interest rate swaps, with hedges typically tied to loan expiries.

• Our TP is pegged to 0.4x FY24F P/BV, which buffers a further 30% decline in asset valuation. KORE’s latest sustainability report shows it is making good incremental progress towards its goal of reducing Scope 1 and 2 emissions. As its 3.1 ESG score is on par with the country median, we apply 0% ESG premium.

Source: RHB Research - 18 Apr 2024