KORE reports strong leasing velocity, targets 'full steam ahead' on acquisitions

THE manager of Keppel Pacific Oak US Reit (KORE) said it is seeing strong leasing velocity across its portfolio of office properties, even as less than half of its tenants have physically returned to the office amid the Covid-19 pandemic.

"On average, we're looking at about 46 per cent of the portfolio that has returned to the office," said David Snyder, chief executive officer and chief investment officer of the real estate investment trust (Reit) manager, in a briefing on Thursday (Jan 27) following its FY2021 results announcement. "That is due in large part to our locations. If we were in New York City or San Francisco, we'd have a much lower percentage that would have actually returned to the office by today."

The Reit manager on Jan 26 said it had committed approximately 250,454 square feet (sq ft) of office space in the Q4 ended December, bringing full-year leasing to over 730,619 sq ft, or some 14.3 per cent of its total portfolio by net lettable area.

Rental reversion continued to remain positive at 6 per cent for FY2021, driven mainly by strong rents in the technology hubs of Seattle - Bellevue/Redmond and Austin.

The US-focused office landlord derives more than 62 per cent of its net property income from the tech hubs of Seattle - Bellevue/Redmond (43.8 per cent), Austin (5.8 per cent) and Denver (12.7 per cent).

As at end-2021, over a third of KORE's tenants operate in the sectors of technology, advertising, media and information, which the manager has identified as key growth areas.

Portfolio committed occupancy stood at 91.9 per cent as at Dec 31, 2021.

"About a third of our (lease) expirations (in FY2022) will be in the Bellevue and Redmond areas, which should continue to drive positive rental reversions for the portfolio," Snyder said. "The other two-thirds will be elsewhere - obviously not nearly as strong - so we would hope to see the average remain in the mid-single digits, which we projected and hit for 2021, as we move into 2022."

"Our market is very different. We've seen rent increases, while San Francisco has had declines," he added.

The way Snyder sees it, KORE's assets in Seattle - Bellevue/Redmond are also likely to see a boost from the presence of tech giants Microsoft and Amazon.

In Bellevue, Amazon has grown more than tenfold over the past decade to more than 45,000 employees, the Reit manager said. Meanwhile, Microsoft has been based in Redmond.

"Those companies attract and have attracted a ton of talent to the area and they brought a lot of other businesses that want to do business with or are doing business with Microsoft and Amazon, and need to be nearby for collaborative purposes," Snyder said.

Noting that Microsoft is redeveloping "a significant chunk" of its campus in Redmond while Amazon is expanding in Bellevue, market supply is expected to be tighter.

"There is basically no new office space that's becoming available for anyone else, which we expect is going to have a positive impact on rents," Snyder said.

Despite lower physical occupancy due to the pandemic, the Reit manager added that KORE continues to see strong leasing velocity.

"At this point with Omicron's resurgence, I don't think we want to be too overly optimistic about the first quarter of 2022... (but) I think we feel much more confident that we will see increases in occupancy during the year," Snyder said.

At the same time, the Reit manager said it is targeting to grow, primarily in the locations that it already has a presence in.

"As we move into 2022, hopefully we'll be seeing something to the tune of US$150 million or US$200 million worth of acquisitions in this year," Snyder said. "That's the target - full steam ahead on the acquisition front."

"We know it's still challenging, given the pandemic and given the more limited supply that we've seen coming into the market, but we do expect to be able to make acquisitions this year," he added.

As at end-December, KORE's aggregate stood at 37.2 per cent, with an interest coverage ratio of 5.1 times and a weighted average term to maturity of 2.8 years.

"We are pretty comfortable (at this gearing level)," said chief financial officer of the Reit manager, Andy Gwee. "That gives us a good headroom up to at least 40 per cent for any small to mid-sized acquisition that may come our way."

For the H2 2021 ended December, KORE reported a distribution per unit (DPU) of 3.18 US cents, up 1.6 per cent from DPU of 3.13 US cents a year ago.

Distributable income rose 10 per cent to US$32.5 million, partly driven by the acquisitions of Bridge Crossing in Nashville, Tennessee, and 105 Edgeview in Denver, Colorado, which were completed last August. The improvement was also partially attributable to positive rental reversions and built-in annual rental escalations across the portfolio.

This brought FY2021 DPU up 1.8 per cent to 6.34 US cents, while full-year distributable income was 6.5 per cent higher at US$62.4 million.

Units of KORE closed 1.9 per cent or US$0.015 lower at US$0.76 on Thursday.