Brokers' take: UOBKH initiates coverage on Keppel Pacific Oak US Reit with 'buy', US$1.10 target price

UOB Kay Hian (UOBKH) has started coverage on Keppel Pacific Oak US Reit (KORE) with a "buy" recommendation and US$1.10 target price, on the belief that it is benefiting from in-migration and the high-growth magnet cities which the real estate investment trust (Reit) focuses on.

In a report on Tuesday, analyst Jonathan Koh lauded KORE as a "much more attractive" Reit compared to its US-listed peers investing in suburban offices. This is because KORE provides a distribution yield of 8.6 per cent as opposed to a "paltry" distribution yield of 3.6 per cent by its peers, in his view.

Mr Koh believes the Reit is oriented towards growth cities currently benefiting from the accelerating in-migration trend in the US.

The analyst observed that Florida, Tennessee, Texas and Washington - which have no state-level personal income tax - accounted for 77.7 per cent of pro forma H1 FY2021 cash rental income (CRI), as well as 82.7 per cent of the Reit's assets under management (AUM) as of August 2021.

He further likes KORE for its focus on Super Sun Belt and 18-hour cities which he describes as "high-growth magnets that attract influx of companies and people" due to low or no state-level taxes, a highly educated workforce generated by renowned local universities, along with their rich amenities and good infrastructure.

In-place passing rents are about 8 per cent below asking rents due to recurrent growth in rents from Super Sun Belt and 18-hour cities, providing room for continued positive rental reversion, said the analyst.

Mr Koh is also positive on the Reit's recent acquisition of two office buildings in 18-hour cities Nashville and Denver, as the deal is estimated to expand KORE's AUM by 8.2 per cent to US$1.41 billion.

"The exposure to technology tenants (with the acquisition of the two buildings) would increase by 4.8 percentage points to 31.2 per cent of pro forma 1H FY021 CRI," he said, noting that tech hub states in the US contributed to 60.9 per cent of the Reit's net profit income in H1 FY2021.

"While distribution yield is similar to other offshore office Reits, KORE offers brighter growth prospects due to growth from in-migration at Super Sun Belt and 18-hour cities and technology tenants," said Mr Koh.

As at 10.54am on Tuesday, units of KORE were flat at 74.5 US cents.