For the 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 the 2QFY2024, income available for distribution also fell by 8.8% y-o-y to US$11.9 million.
Gross revenue for the 1HFY2024 fell by 2.0% y-o-y to US$74.4 million due to lower rental income y-o-y 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 of construction workers from neighbouring developments at The Plaza Buildings in the 1HFY2024.
KORE’s aggregate leverage, as at June 30, stood at 42.7%, down from 43.2% as at Dec 31, 2023, due to the withholding of distributions.
The REIT had successfully refinanced and, or extended its loan facilities totalling US$170.0 million that were originally due in the 4Q2024 and 3Q2025.
For KORE’s CEO David Snyder, nothing has changed for the REIT manager in terms of its distribution plans, despite the better market conditions and operations.
KORE, on Feb 15, announced that it planned to suspend its distributions till 2HFY2025 along with a recapitalisation plan.
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“Nothing has changed at this point with our timing because nothing has changed in the sales market, if you will, in the US for real estate,” says Synder at the REIT’s results briefing on July 31. “We need to see banks coming back 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 take place, they have been “very small”, he adds.
Once the Federal Reserve starts its easing cycle, financing becomes more available and REITs can sell their building, KORE will have the ability of accessing either bank loans, and divesting of a couple of buildings to raise cash.
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“It all comes down to getting the balance sheet right sized, getting leveraged a little bit lower than we've got it now,” Snyder adds.
A key factor that’ll enable KORE to provide distributions is accessing debt to cover the capital expenditure needs in its portfolio, which is expected to continue increasing by 2025. With the expected rate cuts, valuations could stabilise and firms should discount and capitalisation rates fall.
“Right now, we don't see it… in the near term that we're going to have either the ability to sell buildings, or the ability to have those sorts of credit facilities for banks that will enable us to do all of that,” Snyder shares.
At the briefing, Synder welcomed the Monetary Authority of Singapore’s (MAS) proposal to simplify REIT’s capital structure. On July 24, the 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 really liked the direction that MAS is planning to go. That simplifies things, but it doesn't really take the pressure off of a 50% leverage limit, it still makes lenders cautious about anything that approaches 45%,” he says. “But having flexibility in terms of the coverage ratio is a good thing. Nothing's really changed for us, it all really depends on that US side of the market.”
At present, the 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 chief financial officer (CFO) Andy Gwee. However, he adds that the REIT will try to avoid crossing the 45% mark until 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, you know, we might be willing to temporarily go above 45% a little bit, if we've got plans… that have us marketing buildings… for sale,” he adds.
In the long run, the banks and the industry will have to accept that 35% leverage is not “viable” going forward, says Gwee. “They should look at it as in high 30s or low 40s as the new normal.”
To Snyder, as the REIT industry matures in Singapore, it’s going to continue to catch up to the US “in a lot of ways” and one of those 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. And hopefully, what we're seeing here is Singapore banks getting more comfortable with what is a more normal leverage level. [It’s] not risky at all,” he says.
“I mean, if you're talking about 60%, now, we're talking about places that I don't think anybody should get to. But, you know, on the US side, that 40% seems right, I think banks are getting a lot more comfortable with that here in Singapore as well, which I think is good for everybody. Good for the industry and good for the banks, too,” 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 have 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 3 times at -1 standard deviation (s.d.) of KORE’s three-year mean.
KORE’s operating metrics for the 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.”
See also: Occupancy improvements, early refinancing have ‘substantially de-risked’ KORE’s profile: RHB
