On 23 October 2024, Keppel Pacific Oak US REIT (“KORE”) announced their third quarter business update for FY2024. This is a small business update, and KORE has not indicated if they will be resuming any dividends in the near future. The next announcement for the full financial year FY2024 will mark the anniversary of them suspending dividends. We will be able to see if there are any further valuation write-downs, as well as better guidance on the outlook for US commercial properties.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Financial Highlights
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | No Info |
| Rating | Unfavorable | Unfavorable |
Based on the announcement on 23 October 2024, DPU was not included in the business update for the third quarter of FY2024. However, the expectation is that there will be no DPU till at least the end of 2025. This metric is Unfavorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 88.7% | 90.7% |
| Rating | Unfavorable | Unfavorable |
Occupancy rate as of 30 September 2024 decreased to 88.7%. 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 | 42.6% | 42.7% |
| Rating | Unfavorable | Unfavorable |
Gearing ratio remained relatively unchanged at 42.6% as of 30 September 2024, with no changes to total borrowings. The metric remains Unfavorable. As 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 | 2.7x | 2.9x |
| Rating | Neutral | Neutral |
The interest coverage decreased to 2.7 times as of 30 September 2024. The metric has remained Neutral as the interest coverage this quarter remain below my preference of 3.0 times.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.3 years | 2.3 years |
| Rating | Favorable | Favorable |
Weighted average term to maturity of their debt remained unchanged at 2.3 years as of 30 September 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 | 0.33 | 0.35 |
| Rating | Favorable | Favorable |
Based on the announcement on 23 October 2024, Net Asset Value (“NAV”) was not included in the business update for the third quarter of FY2024.
The Price to Book (“P/B”) ratio currently stands at 0.33. This is computed using the closing share price of USD0.235 on 6 December 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 December 2024, the Market Capitalization is approximately USD245 million.
Website: Yahoo Finance: Keppel Pacific Oak US REIT (CMOU.SI)
Dividend
Based on management guidance, the dividend yield for 2024 is 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 7 November 2024 have further slashed interest rate by a quarter point to a range of 4.50% to 4.75%. This is in line with earlier expectations for future rate cuts, which will benefit REITs in general.
Website: Federal Reserve cuts interest rates by a quarter point
The Federal Reserve has subsequently announced on 15 November 2024 that they will cut their key interest rate slowly and deliberately in the coming months, in part because inflation has shown signs of persistence, and the officials want to see where it heads next.
Website: Powell says Fed will likely cut rates cautiously given persistent inflation pressures
KORE have provided the interest rate sensitivity analysis as below. Should the interest rate change by another 1.0%, using FY2023 distributable income of USD52 million as a base, distributable income is expected to change by 3.4%.
| Change in Interest Rates | Change in Distributable Income (USD’000) | Change as % of FY2023 Distributable Income |
|---|---|---|
| 50 bps | $900 | 1.7% |
| 100 bps | $1,800 | 3.4% |
| 150 bps | $2,700 | 5.2% |
| 200 bps | $3,600 | 6.9% |
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 29.2% of KORE’s portfolio with no single tenant accounting for more than 4.0% during the period, providing income diversity to the portfolio. Furthermore, the WALE of the top 10 tenants is 4.2 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.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Unfavorable |
| Occupancy | 88.7% | Unfavorable |
| Gearing Ratio | 42.6% | Unfavorable |
| Interest Coverage | 2.7x | Neutral |
| Debt Maturity Profile | 2.3 years | Favorable |
| Price to Book Ratio | 0.33 | Favorable |
| Overall | Neutral |
Overall, the metrics remained Neutral to invest in KORE. However, as management has not given any indication if KORE will be distributing any dividends in the near future, there may be other dividend stocks that have better risk to reward. It may be Unfavorable given that we have seen interest coverage and the debt maturity profile continue to worsen, which may further hinder KORE’s ability to distribute dividends.
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”).
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Website: Keppel Pacific Oak US REIT (SGX: CMOU): 2024 Half Year Result
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