Apart from Prime US REIT (you can check out my in-depth review about it following my conversation with the management here), another REIT listed on the Singapore Exchange that focuses on US office properties is Keppel Pacific Oak US REIT (SGX: CMOU), commonly referred to as KORE.

KORE was listed on the Singapore Exchange in November 2017 with an IPO price of US$0.88, opening at US$0.845 on its first trading day. The REIT’s highest traded price was US$0.87 in 2018. However, as of the time of writing, its unit price has dropped to around US$0.265, representing a significant decline of 69.5%.

With the first interest rate cut already in place, and more expected till end-2026 (which could bring benchmark borrowing rates down to approximately 3% by then), along with a growing trend of US companies phasing out remote work and returning to a full 5-day workweek, these factors could act as tailwinds for REITs investing in office properties in the country like KORE.

Hence, is now the right time to take a closer look at the REIT and ride on its potential recovery? In this post, I will cover the key essentials you need to know, including an overview of KORE’s business, its financial performance, portfolio occupancy, debt profile, and distribution payouts over the past 5 years.

Let's dive in!

Brief Introduction about Keppel Pacific Oak US REIT

KORE’s investment strategy targets the rapidly expanding sectors of technology, advertising, media, information, as well as medical and healthcare industries across key growth markets in the United States.

As of 30 June 2024, its portfolio consists of 13 freehold office buildings and business campuses spread across 8 major growth markets. These include 3 properties in Seattle, Washington, 2 in Austin, Texas, 2 in Denver, Colorado, 1 in Nashville, Tennessee, 2 in Houston, Texas, 1 in Dallas, Texas, 1 in Orlando, Florida, and 1 in Sacramento, California – markets driven by technology and innovation. The total asset value of the portfolio stands at US$1.36 billion.

Financial Performance

KORE’s financial year ends on 31 December each year.

The table below summarises key financial figures reported over the past 5 years, from 2019 to 2023:

Few key observations:

1. KORE’s gross revenue increased each year over the last 5 years, from US$122.9 million in 2019 to US$150.8 million in 2023, achieving a compound annual growth rate (CAGR) of 4.2%, which is quite respectable.
   
2. While net property income dipped slightly by 0.4% in 2021 to US$82.7 million, if non-cash adjustments (such as straight-line rent, lease incentives, and amortisation of leasing commissions, which don't affect distributable income) were excluded, the adjusted net property income would have shown a 3.6% increase year-on-year. Over the 5-year period, net property income grew at a CAGR of 2.9%.
   
3. Although the percentage growth in income available for distribution has tapered off over the years (particularly in 2023, where it saw a 13.8% year-on-year slump, mainly due to higher financing costs), KORE still managed a modest CAGR of 0.5% in this area over the past 5 years.

Distribution Payout to Unitholders

KORE's management declares distributions to unitholders on a semi-annual basis.

The table below summarises the REIT's distribution payout over the past 5 years, from 2019 to 2023:

There were year-on-year declines in distributions during 2022 and 2023.

In 2022, this was due to the Manager choosing to receive 100% of its base fee in cash starting from the 2nd quarter. The sharp decline in 2023 was primarily due to the absence of distributions for the 2nd half of the year as part of a recapitalisation plan.

It's important to note that KORE's management has announced a suspension of distribution payouts starting from the second half of 2023, expected to last until the second half of 2025. According to them, this move aims to strengthen the REIT's balance sheet while reinvesting the suspended distributions to maintain and improve its properties to ensure they remain attractive to current and prospective tenants.

Portfolio Occupancy Profile

Now, let's examine KORE's portfolio occupancy over the past 5 years (from 2019 to 2023), as shown in the table below:

KORE has a diverse tenant base with over 380 distinct tenants. The top 10 tenants account for 26.3% of the REIT’s CRI (Cash Rental Income), with Ball Aerospace and Comdata Inc. being the largest contributors, each making up 3.7%. No other tenant exceeds 2.9% of the CRI, indicating minimal tenant concentration risk.

While portfolio occupancy has declined from 93.6% in 2019 to 90.3% in 2023, this is still a relatively strong level.

As of the end of 31 December 2023, except for 2 properties (Iron Point, which has an occupancy of 64.2%, and Westech 360, which has an occupancy of 78.0%), the remaining 11 properties are more than 80% occupied.

Looking ahead, the lease expiries are well-distributed, with 9.7% of leases expiring in 2024, an average of 17.5% expiring annually between 2025 and 2027, and 37.9% due for renewal only in 2028 or later.

Debt Profile

The table below presents KORE’s debt profile over the past five years, from 2019 to 2023:

The sharp interest rate hikes by the US Federal Reserve between March 2022 and July 2023, which saw benchmark borrowing rates rise from 0-0.25% to a two decade high of 5.25%-5.50%, and this significantly impacted KORE.

In 2023, KORE's aggregate leverage reached 43.2%, the highest in 5 years, while its all-in average cost of debt increased to 4.12%. Meanwhile, the interest coverage ratio dropped to a 5-year low of 3.2x.

Regarding debt maturity, KORE has 12.5% of its borrowings due for refinancing in the fourth quarter of 2024. Another 25.7% is due for refinancing in 2025, followed by 6.6% in 2026. The remaining 55.2% is scheduled for refinancing in 2027 or beyond.

Closing Thoughts

With distribution payouts suspended until the second half of 2025, I believe the KORE's unit price is likely to remain weak in the short to mid-term, as retail investors opt to invest in REITs that continues to pay out a distribution.

One significant challenge that the US office REIT faces is its relatively high aggregate leverage of 43.2% in 2023, compared to most Singapore REITs, which typically aim to keep this ratio at or below 40%. However, with 73.8% of its borrowings hedged at fixed rates, any rate cuts announced by the US Federal Reserve could benefit the REIT by lowering its financing costs and reducing its aggregate leverage.

Despite these challenges, the REIT has demonstrated decent financial performance over the past 5 years, although there have been some dips in its income available for distribution in the last 2 years (particularly in 2023, where it has recorded a 13.8% year-on-year decline). Its portfolio occupancy remains relatively high, above 90%, though it has declined slightly over time.

For investors considering the REIT, patience is key.2 potential catalysts I foresee are further improvements in portfolio occupancy, particularly in properties like Iron Point and Westech 360, and the resumption of distribution payouts.

On the flip side, a major risk is the growing trend of companies mandating a full 5-day office return. While this bodes well for the US office landlords, it remains to be seen if it could result in employee backlash, with top talent leaving for firms that maintain remote or hybrid work models. If this trend reverses, companies may reconsider and downsize their office space needs, which could increase vacancy rates in KORE's properties.

With that, I conclude my review of KORE. I hope this post has provided you with a clearer understanding of this US office REIT. Please note that everything shared is for educational purposes only and does not constitute any buy or sell recommendations. Always conduct your own research before making any investment decisions.

Disclaimer: At the time of writing, I am not invested in Keppel Pacific Oak US REIT.

The post The Essentials of Keppel Pacific Oak US REIT You Need to Know first appeared on The Singaporean Investor.