• Keep BUY and USD0.29 TP, 20% upside. Keppel Pacific Oak US REIT's 2H/FY24 financials were in line. Portfolio valuation remained stable YoY (excluding capex), slightly better than our expectations - we believe its valuation has bottomed. US office demand is starting to show clear stabilisation signs with increasing return-to-office mandates and economic growth. This has largely abated KORE's debt refinancing concerns and is likely to result in a better investment landscape ahead. Key catalysts will be the gradual decline of interest rates and resumption of dividends in FY26.
• Portfolio occupancy improved QoQ to 90% (3Q: 88.7%), mainly from expansion demand at Bellevue Technology Center and the signing of a new healthcare tenant at Maitland Promenade. Occupancy though is expected to slightly decline (~2ppt) in the upcoming quarters due to known tenant vacates at The Plaza buildings and Westmoor Center, which we expect to be backfilled by end of the year. Overall leasing volume (FY24) saw a sharp jump to 0.9m sqf or 19.6% of portfolio NLA, surpassing the 2019 level as many companies establish regular office attendance requirements and an increase in US office-using employment. Key sectors driving office demand include finance and legal firms, healthcare and companies in the artificial intelligence (AI) segment. Rent reversion was -0.5% for FY24 (4Q: +1.7%) mainly affected by renewals at The Plaza buildings and Westmoor Center which were signed at lower rents. We expect rent reversion to be flattish for FY25.
• Dividend resumption on track for FY26. We expect KORE to set aside a certain amount of distributable income as capex reserve and distribute the remaining from FY26, in order to maintain dividend sustainability. We currently assume a 90% payout. No changes to the USD50m capex guidance for FY25, which will be mainly funded from retained distributions. Management noted that the investment market has yet to show a meaningful recovery and it is not in a rush to divest any of its assets, as gearing is relatively comfortable at 43.7%.
• FY24 distributable income fell 9% YoY on the back of lower adjusted NPI (-5%) and higher finance costs (+11%). We expect financing costs to see a slight 20-30bps increase in FY25 to 4.7-4.8% levels, due to the roll-off of USD100m in swaps later this year. Portfolio value remained stable YoY at USD1.3bn as at end FY24 but taking into consideration capex and tenant improvements for 2024, there was a fair value loss of USD46.7m.
• No significant earnings change. We introduce FY27F. Our TP is pegged at 0.4x FY25F book value and includes a 0% ESG premium/discount.

Source: RHB Research - 5 Feb 2025