3Q23 Results Analysis: Resilient amidst near-term headwinds

• 3Q23 DPU -11% y-o-y (flat q-o-q) to 1.25 UScts, above our conservative estimates, in line with consensus. This is mainly due to higher interest costs
• Key positives: i) portfolio occupancy improved to 91.4%, ii) continue to record positive reversions, iii) gearing remained below 40% with 24% buffer for asset valuation decline
• Key data to watch: i) portfolio valuation risks at year-end may push gearing to slightly above 40%, ii) some occupancy risks in FY24F but expect to remain at healthy levels
• Portfolio more resilient compared to peers despite some near-term cautious outlook. Maintain BUY TP US$0.48. Currently trades at 0.3x P/NAV and c.20% FY24F yield

 

 

What happened?

Stable q-o-q performance improved occupancy, holding above 90% with positive rental reversions.  3Q23 DPU fell 11% y-o-y (flat q-o-q) to 1.25 UScts, mainly due to higher interest rates. This is above our conservative estimates. On a like-for-like basis (adjusting 1H22 for management fees in cash), 9M23 estimated DPU fell 15% y-o-y, partially from divestments of 2 assets and higher interest cost. Gearing and average cost of debt inched up marginally q-o-q to 39.1% (38.4% in 2Q23) and 4.06% (4% in 2Q23) respectively. There are no refinancing needs until 4Q24. Portfolio occupancy improved to 91.4% from 90.8% 2Q23 mainly from all three of the assets in Seattle (largest from Bellevue Tech Center +2.2 ppt q-o-q to 91.2%), Maitland Promenade (+2.2 ppt q-o-q to 87.7%) and One Twenty Five (+1.2 ppt q-o-q to 93%). Terra Power, the largest tenant at Bellevue Tech Centre took up more space while Maitland Promenade saw positive signs where there were increasing interests to take up larger spaces. A tenant took up a full floor at Maitland, backfilling ahead of a space that was vacating at year-end. Westech 360 in Austin continues to struggle with a 3.9 ppt q-o-q decline in occupancy to 78%. 3Q23 rental reversions were +3.8% vs 2% in 2Q23. 3Q23 saw completed lease volume improved to 250k sqft, above the pre-COVID average quarterly volumes of c.210k sqft, following a soft 2Q23 which completed only c.70k sqft of leases. KORE&rsquo s markets are seeing slight uptick in physical occupancy during the quarter to 67% from 65% in 2Q23.    

 

Our view

KORE&rsquo s portfolio more resilient despite turning more cautious on year-end valuation maintain BUY TP of US$0.48.  KORE has delivered very resilient performance thus far, amidst a challenging US office market. In this quarter, management has turned a little more cautious as the US office market remains challenging in spite of some green shoots seen in selective markets. Occupancy may have a little downside risks heading towards FY24 but management is confident it will remain at healthy levels and higher compared to peers. Given the recent spike in interest rates, management is mindful that valuations may see further discount rates / cap rates expansion risks at year end but believes its better than industry performance may keep valuation risks at below 10%. If this realised, gearing may increase to slightly above 40% level though we believe there&rsquo s sufficient gearing buffer (24% decline in valuation) before gearing will hit 50%. Despite a more cautious outlook, we believe KORE&rsquo s portfolio has been more resilient compared to the industry. We maintain our BUY rating and TP of US$0.48. We continue to monitor re-rating catalysts for the sector and expect the stabilisation of interest rates will help to improve sentiment.