Keppel Pacific Oak US Reit posts 5.4% rise in H1 distribution income

KEPPEL Pacific Oak US Reit (KORE) on Wednesday (Jul 27) reported a 5.4 per cent rise in distribution income for H1 2022 to US$31.5 million from US$29.9 million a year prior.

Distribution per unit (DPU) for H1 however fell 4.4 per cent from US$0.0316 to US$0.0302 due to the manager taking all of their base fee in cash rather than in units. If the manager had taken their base fee in units, the DPU would have been 0.7 per cent higher.

Revenue for the period rose 8.4 per cent to US$74.1 million from US$68.4 million a year ago. The growth in revenue was driven by contributions from 105 Edgeview and Bridge Crossing, and higher recoverable property expenses and higher car park income as employees return to office. This was partially offset by lower rental income from leases that were not renewed in late-2021, as well as major leases in 2022 still in their rent-free period.

Net property income for H1 also grew in tandem, up 5.9 per cent from US$40.6 million to US$43 million.

KORE’s occupancy rate stands at 92 per cent as of Jun 30, with 6.4 per cent of leases by cash rental income expiring in H2. Rental reversion remained positive at 1.6 per cent for the period, with average rental collections at 99 per cent.

David Snyder, chief executive and chief investment officer of the manager, gave some colour to the rental reversion rate at a briefing discussing the latest financials, pointing out that the figure was pulled down significantly by one deal.

It relates to a deal with Terrapower, which had to take up a space at its Bellevue Technology Center property to temporarily host some of its operations while the Reit works on readying their space.

Excluding this particular lease, the Reit is looking at a positive rental reversion of about 3.9 per cent in H1, he said, adding that the reversion in the second quarter was “quite strong”, coming in at about 4.5 per cent.

In giving his outlook for rental reversions in H2, Snyder said he is “cautiously optimistic” and would be “pretty happy” with a mid-4 per cent result.

Asked how rent can increase when the US economy is slowing sharply, Snyder said the question might be more relevant in a typical recessionary timeframe, but the current slowdown is brought about “almost exclusively” by the Fed raising interest rates.

“The problem is, demand is so strong that it has driven significant inflation… It is not a typical scenario where you’ve got a downturn, the economy is doing poorly. The economy is very strong, give or take what we saw with the GDP,” he said.

Moving forward, KORE will continue to monitor its current portfolio and seek opportunities in key growth markets in the US propelled by technology and innovation, and pursue value-accretive acquisitions that will enhance the Reit’s income resilience and long-term growth, Snyder said.

On the divestment front, the Reit has entered into purchase and sale agreements with external parties for the sale of its Atlanta properties, namely Powers Ferry and Northridge Center I and II. The divestments are expected to be completed by end-September, subject to the satisfaction of certain conditions.

Asked at the briefing if any other of its assets fit its criteria for divestment, Snyder said Iron Point in Sacramento, California is a property that KORE would be exploring the sale of “when the time is right”.

“At the moment, it is not the easiest time to be selling assets. A lot of transactions have been having trouble. We are pretty pleased that so far we have not seen that, with the 2 that we have under contract or are attempting to sell right now,” he said.

Units of KORE closed 0.7 per cent or US$0.005 lower at US$0.69 on Wednesday.