In 1HFY2024 ended June 30, Keppel Pacific Oak US REIT (KORE) reported an income available for distribution of US$23.8 million ($31.8 million), 8.8% lower y-o-y. During 2QFY2024, income available for distribution also fell 8.8% y-o-y to US$11.9 million.
Gross revenue in 1HFY2024 fell 2% y-o-y to US$74.4 million due to lower rental income from the reduction in non-cash amortisation of straight-line rent and lease incentives. The lower non-cash amortisation was due to timing differences in leasing completed for the respective periods. Carpark income also fell from lower usage by construction workers in neighbouring developments at The Plaza Buildings.
Net property income (NPI) in 1HFY2024 fell by 4.2% y-o-y to US$42.0 million as property expenses increased 1% y-o-y to US$32.4 million. Net income for the six-month period fell by 15.4% y-o-y to US$20.4 million.
As of June 30, KORE’s aggregate leverage stood at 42.7%, down from 43.2% as of Dec 31, 2023, due to the withholding of distributions.
The REIT successfully refinanced or extended its loan facilities totalling US$170 million, which were initially due in 4Q2024 and 3Q2025.
However, KORE’s CEO David Snyder says that despite better market conditions and operations, the REIT manager’s distribution plans have remained unchanged.
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On Feb 15, KORE announced that it planned to suspend its distributions till 2HFY2025, along with a recapitalisation plan. “Nothing has changed at this point with our timing because nothing has changed in the sales market in the US for real estate,” says Synder at the REIT’s results briefing on July 31. “We need to see banks returning to the lending market and lending against US offices. As of today, it’s still not happening in the US.”
Although the market has seen some sales transactions, they have been “very small”, he adds.
Once the Federal Reserve starts its easing cycle and financing becomes more available, REITs will be able to sell their buildings. KORE can then access bank loans or divest a couple of buildings to raise cash.
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“It all comes down to getting the balance sheet right-sized and getting leveraged a little bit lower than we’ve got it now,” Snyder adds.
A key factor that will enable KORE to provide distributions is accessing debt to cover capital expenditure needs in its portfolio, which is expected to continue increasing in 2025. With the expected rate cuts, valuations could stabilise should discount and capitalisation rates fall.
“Right now, we don’t see it in the near term. We’re going to have either the ability to sell buildings or have those sorts of credit facilities from banks that will enable us to do all of that,” Snyder shares.
At the briefing, Synder also welcomed the Monetary Authority of Singapore’s (MAS) proposal to simplify the capital structure of REITs. On July 24, MAS published a consultation paper to subject all REITs to a minimum interest coverage ratio (ICR) of 1.5 times and an aggregate leverage limit of 50%.
“We’ve liked the direction that MAS is planning to go. That simplifies things, but it doesn’t take the pressure off with a 50% leverage limit. It still makes lenders cautious about anything that approaches 45%,” he says. “But having flexibility in the coverage ratio is a good thing. Nothing’s changed for us as it all depends on that US side of the market.”
At present, bank covenants for the REIT’s new loans are the same as the rest of their portfolio’s loans at an ICR of 1.5 times and leverage of 50%, says CFO Andy Gwee. However, he adds that the REIT will only try to cross the 45% mark if the banks are comfortable.
“There are lenders here in Singapore that are continuing to lend or at least roll forward loans and potentially making new loans, which we would be trying to take advantage of,” says Snyder.
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“But once we get to the point where we’re able to obtain some new credit facilities that give us some flexibility, we might be willing to temporarily go a little above 45% if we’ve got plans to market buildings for sale,” he adds.
In the long run, the banks and the industry will have to accept that 35% leverage is not “viable”, says Gwee. “They should look at the high 30s or low 40s as the new normal.”
Snyder adds that as the REIT industry matures in Singapore, it will continue to catch up with the US “in a lot of ways”, one of which is leverage.
“If you look at US REITs, the standard for decades has been 40%. And you’ll see them go a little above and a little below periodically. But 40% is the right number. 35% never was. Hopefully, what we’re seeing is Singapore banks getting more comfortable with a more normal leverage level. It is not risky at all,” he says.
“I don’t think anybody should get to 60%. But on the US side, 40% seems right; I think banks are getting a lot more comfortable with that here in Singapore as well. I think this is good for everybody. Good for the industry and good for the banks,” he adds.
DBS upgrades KORE to ‘hold’
On Aug 1, DBS Group Research analysts Derek Tan and Dale Lai upgraded their call on KORE to “hold” from “fully valued”. The analysts also increased their target price estimate to 21 US cents from 10 US cents previously.
“With the worst of its financial pressures over and a potential funding gap risk that did not materialise, we are turning more confident that KORE is unlikely to be a seller of assets in the current subdued transaction market,” they write. Their new target price is pegged to a P/B of three times at –1 standard deviation (s.d.) of KORE’s three-year mean.
KORE’s operating metrics for 1HFY2024 showed signs of stabilisation, with a sequential increase in occupancy rates to 91%, the analysts note. “KORE is starting to see green shoots emerging in 1HFY2024, executing a significant amount of leasing through 1HFY2024, resulting in overall portfolio occupancy rates seeing sequential improvement through 1HFY2024, hitting [around] 90.7% in 2QFY2024, a commendable effort in our view,” they write.
“The manager remains opportunistic in their leasing strategy in order to build up cash flows for the portfolio,” they add. During the period, the REIT manager managed to refinance its near-term debt expiring in 2024 to 2025 by a year, which allows them to have more financial flexibility, the analysts point out. The debt refinancing also allowed the manager to “sweat their portfolio” in the midst of a subdued operating climate.
“We note a rise in all-in interest costs to 4.56% (from 4.47% including upfront costs) as a manageable move that is a reflection of banks’ comfort with the REIT’s financial metrics and lineage,” say Tan and Lai. “With only 17% of its total debt of US$607.2 million expiring in 2025 and with stable cash flows supported by improving occupancy rates, we see improved ability and liquidity for KORE to undertake near-term capital improvements.”
RHB keeps ‘buy’ with KORE on track
RHB Bank Singapore analyst Vijay Natarajan kept his “buy” call on KORE with an unchanged target price of 29 US cents after the REIT’s 1HFY2024 financials were “broadly in line” with his full-year forecast.
“Management continues to adopt a prudent stance with the likelihood of early resumption of distributions (before 2026) only upon potential divestment,” he writes in his July 31 report.
In his view, the key highlights were the better q-o-q occupancy rate due to improvements seen in One Twenty Five, Iron Point and The Westpark, as well as the early refinancing of loans expiring in 4QFY2024 and FY2025. The latter “substantially de-risked” KORE’s profile, says Natarajan.
Of the US$75 million in loans that were due for renewal in 4QFY2024, KORE refinanced US$30 million for a three-year term, while US$25 million has been extended for a year. KORE’s manager says it is in discussions for the remaining US$20 million.
The REIT also secured a one-year extension for US$115 million in loans expiring in August 2025. It is engaging with the banks for the remaining US$40 million due in 2025.
“The revised all-in average cost of debt came in better than expectations at 4.56% per annum (p.a.) vs an estimated 4.75% p.a. (it is currently at 4.47% p.a.) with management noting a 20 basis point (bps) to 30 bps expansion in margins for new loans,” Natarajan writes.
Regarding the REIT’s improved occupancy, the analyst notes that the US office REIT’s leasing demand strengthened in 1HFY2024, with 11% of net lettable area (NLA) signed. Demand came from diverse segments, including insurance, consulting and healthcare.
Around 7% of leases by rental income are due for renewal in 2HFY2024, with some being known to vacate in 4QFY2024.
“Management expects this to be backfilled, although there could be a transition period. KORE expects occupancy by the end of 2024 to be at 86%–88% levels,” says Natarajan.
Rent reversion also swung back into the black at 1.2% in the 2QFY2024 from –1.4% in the quarter before. Rent reversion for the 1HFY2024 still stood at –1.3%.
When queried about the early resumption of distribution payments, KORE’s manager was cautious, stating that any early dividend payments (before 2026) will hinge on KORE’s ability to divest assets, which are likely to be Iron Point and 1800 West Loop, says Natarajan. These two properties would lower the REIT’s gearing and provide a comfortable debt cushion.
“[KORE’s] current plan is to remain focused on the efficient deployment of withheld distribution on improving its core assets — mainly on building spec suits, tenant incentives and upgrading amenities that will improve leasing prospects in competitive markets and maintain long-term asset value,” he adds.
The analyst says KORE’s share price has staged a “good recovery” recently. He sees some near-term volatility before the next leg of recovery upon commencement of rate cuts.
KORE’s units closed at 20 US cents on Aug 8, making this the highest month-long close. — with additional reporting by Jovi Ho
