On 17 April 2024, Keppel Pacific Oak US REIT (“KORE”) have announced their first quarter business update for 2024. There are no significant changes to the fundamentals of KORE when compared to the previous quarter, and their gearing ratio continues to remain high. Based on this quarter business update, it is unlikely that distributions will resume in the short-term as this was the basis that management have used to halt distributions to prevent potential breaches of gearing. Investors will therefore need to assess their risk appetite accordingly.
Background
KORE is a distinctive office REIT listed on the main board of the Singapore Exchange Securities Trading Limited (“SGX-ST”) on 9 November 2017.
KORE’s leverages its focus on the fast-growing technology, advertising, media and information (“TAMI”), as well as medical and healthcare sectors across key growth markets in the United States (“US”) and aims to be the first choice US office S-REIT providing sustainable distributions and strong total returns for Unitholders.
KORE invests in a diversified portfolio of income-producing commercial assets and real estate-related assets in key growth markets characterised by positive economic and office fundamentals that generally outpace the US national average and the average of gateway cities. These markets include the Super Sun Belt and 18-Hour Cities, which have and continue to see an accelerated influx of talent as part of The Great American Move.
KORE is managed by Keppel Pacific Oak US REIT Management Pte. Ltd., which is jointly owned by two Sponsors, Keppel Capital and KORE Pacific Advisors (“KPA”).
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | – 56.9% |
Based on the announcement on 17 April 2024, DPU was not included in the business update for the first quarter of 2024. However, the expectations is that there will be no DPU till at least the end of 2025. This metric is Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 90.1% | 90.3% |
Occupancy rate as of 31 March 2024 remain relatively unchanged at 90.1%. This is Unfavorable as it is below my expected healthy occupancy rate of 95% and KORE have not been able to fully utilize their assets.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 43.0% | 43.2% |
Gearing ratio remain relatively unchanged at 43.0% as of 31 March 2024. The metric remains Unfavorable. With the gearing ratio remaining high, it is unlikely for management to resume dividend as they will need to withhold dividend and use the proceeds to enhance their assets, maintaining their buffer from the MAS limit of 50%.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 3.0x | 3.2x |
The interest coverage stands at 3.0 times as of 31 March 2024. The metric is Favorable as the interest coverage is around my preference of 3.0 times.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.5 years | 2.7 years |
Weighted average term to maturity of their debt shortened to 2.5 years as of 31 March 2024. The metric remains Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.20 | 0.22 |
Based on the announcement on 17 April 2024, Net Asset Value (“NAV”) was not included in the business update for the first quarter of 2024.
The Price to Book (“P/B”) ratio currently stands at 0.20. This is computed using the closing share price of USD0.140 on 31 May 2024 and the net asset value per share of USD0.690 as of 31 December 2023.
The metric remains Favorable as we are paying below book value for its assets. This provides sufficient buffer should there be a significant write-down of valuation for its assets. However, there is a reason for it to be traded at this P/B ratio and is covered under the “Key things to note” section. This is something investors should take into consideration when looking at the P/B ratio.
As of 31 May 2024, the Market Capitalization is approximately USD146 million.
Dividend
Based on management guidance, the expected dividend yield for 2024 will be 0.00% given that distributions are suspended till at least 2025. Investors will need to wait for further announcements for clarity on future plans and expected dividend payouts when the conditions improve.
Interest Rate Sensitivity
The Federal Reserve on 2 May 2024 has signalled that US borrowing costs are likely to remain higher for longer, as it wrestles with persistent inflation across the world’s biggest economy. This was after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023.
Website: Federal Reserve chair Jay Powell signals interest rates will remain higher for longer
Should the interest rate may increase further, KORE may be subjected to significant change in their cost of debt in the near future. The debt profile of KORE is as below:
| Description | Amount (USD’000) |
|---|---|
| Total Debt | $607,200 |
| Debt Not Hedged (%) | 31.0% |
| Debt at Floating Rate Exposed | $188,232 |
| Distributable Income FY2023 | $52,223 |
Using the above information, interest rate sensitivity is as below:
| Change in Interest Rates | Decrease in Distributable Income (USD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$941 | -1.8% |
| + 100 bps | -$1,882 | -3.6% |
| + 150 bps | -$2,823 | -5.4% |
| + 200 bps | -$3,765 | -7.2% |
| + 250 bps | -$4,706 | -9.0% |
| + 300 bps | -$5,647 | -10.8% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, KORE may experience a fall in DPU accordingly.
Other metrics
Tenant profile
KORE has an enlarged portfolio covering multiple trade sectors. The high quality and diverse tenant base provide resilience to the KORE portfolio across challenging events. The top-10 tenants accounted for 27.3% of KORE’s portfolio with no single tenant accounting for more than 3.8% during the period, providing income diversity to the portfolio. Furthermore, the WALE of the top 10 tenants is 4.8 years, which provides a strong income visibility as the US rides out the uncertainty.
Key things to note
Risk of property valuation write-down
The announcement on 15 February 2024 have announced a property valuation write-down by 6.80% and has caused gearing to increase from 39.1% to 43.2% as of 31 December 2023.
Using the value of investment properties and total assets of USD1,327 million and USD1,393 million respectively as of 31 December 2023, with the gross borrowings of USD607 million as of 31 March 2024 there is a buffer of only USD179 million before reaching the MAS limits of 50.0%. This means that the investment properties can only afford to decrease in valuations by approximately 13.5%. This is something to keep in mind considering that KORE saw the valuation decrease by 6.8% in 2023, and there may be further valuations decrease over the next 2 years.
There are Commercial Real Estate loan issues in the US which may result in unfavorable terms for KORE refinancing. Should there be breaches in loan covenants, it may result in KORE undertaking an emergency Equity Fund Raising or divestment at discounted selling prices. Both options are considered unfavorable to unitholders.
Website: Commercial Real Estate Loans: A ticking time bomb for US banks
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Unfavorable |
| Occupancy | 90.1% | Unfavorable |
| Gearing Ratio | 43.0% | Unfavorable |
| Interest Coverage | 3.0x | Favorable |
| Debt Maturity Profile | 2.5 years | Favorable |
| Price to Book Ratio | 0.20 | Favorable |
| Overall | | Neutral |
Overall, the metrics remained relatively unchanged from the previous quarter, indicating that it is still Neutral to invest in KORE. With the uncertainty around interest rates, KORE remains the REIT with the highest risk to reward ratio that I am holding and covering in my blog with its direct and concentrated exposure to the US office space.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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