On 31 July 2024, Keppel Pacific Oak US REIT (“KORE”) have announced their half year result for FY2024. The metrics remain relatively unchanged, and as management have declared in the previous quarters, they have continued to suspend the dividend payout that unitholders would have received in September 2024 while waiting for the macro environment to improve. With the Federal Open Market Committee expecting to meet the following week on 17 September 2024 with the highly anticipated interest rate cut, this will provide better guidance to investors, as the share price has seen a significant increase over the last few months to USD0.250 per share as of 6 September 2024.
Website: Financial Statements and Related Announcement::Half Yearly Results
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 | No Info |
Based on the announcement on 31 July 2024, KORE has reaffirmed that distributions will remain suspended for the period from second half of 2023 to second half of 2025 as declared in the previous quarters by management. They have disclosed that income available for distribution have decreased by 8.8% to USD23 million. This metric is Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 90.7% | 90.1% |
Occupancy rate as of 30 June 2024 increased to 90.7%. This metric remains 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 | 42.7% | 43.0% |
Gearing ratio remain decreased slightly to 42.7% as of 30 June 2024. There are no changes to total borrowings, therefore the decrease in gearing was due to the overall increase in net asset value. 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 | 2.9x | 3.0x |
The interest coverage decreased to 2.9 times as of 30 June 2024. The metric has become Neutral as the interest coverage this quarter fall below my preference of 3.0 times.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.3 years | 2.5 years |
Weighted average term to maturity of their debt shortened to 2.3 years as of 30 June 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 | 0.35 | 0.20 |
The Price to Book (“P/B”) ratio currently stands at 0.35. This is computed using the closing share price of USD0.250 on 6 September 2024 and the net asset value per share of USD0.710 as of 30 June 2024.
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 6 September 2024, the Market Capitalization is approximately USD271 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 23 August 2024 has signaled that they are ready to cut interest rates, confident that inflation is easing to normal levels and wary of any more slowing in the job market. This was after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023. Take note however that there were no specific timeline or forecasts, though market expectations are that the cut will happen in September 2024.
Website: Fed Chair Powell: ‘The time has come’ for interest rate cuts
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% |
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.
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 28.2% 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 4.5 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 6.8% 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 USD1,355 million and USD1,423 million respectively as of 30 June 2024, with the gross borrowings of USD607 million as of 30 June 2024 there is a buffer of USD209 million before reaching the MAS limits of 50.0%. This means that the investment properties can only afford to decrease in valuations by approximately 15.4%. 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 loan delinquencies reaccelerate as loan growth slows
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Unfavorable |
| Occupancy | 90.7% | Unfavorable |
| Gearing Ratio | 42.7% | Unfavorable |
| Interest Coverage | 2.9x | Neutral |
| Debt Maturity Profile | 2.3 years | Favorable |
| Price to Book Ratio | 0.35 | Favorable |
| Overall | Neutral |
Overall, the metrics remained Neutral to invest in KORE. Do note that the current market narrative is for interest rate cut to happen in September 2024, which would be favorable to KORE. However, until the rate cuts occur, 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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Website: Keppel Pacific Oak US REIT (SGX: CMOU): 2024 First Quarter Business Update
