Down the same path
- Downgrade to FULLY VALUED; lower TP to US$0.10, based on 0.15x P/B
- KORE is suspending dividends until end-2025 in a proactive strategy to build up liquidity
- Gearing (43%) and ICR ratio (3.2x) within MAS limits, despite better-than-expected asset value adjustment (-7% y-o-y)
- 2nd US REIT to suspend dividends, attention will likely turn to PRIME US REIT, whose financial metrics are weaker
Gearing kept within limits but dividends suspended until 2H2025
- Keppel Pacific Oak US REIT (KORE) announced, together with its 4Q23 results, that the manager intends to suspend dividends till 2H25 and announced a recapitalisation plan with a goal to meet the leverage ratio requirements of the MAS and banks.
- We note that the overall results were in line. Gearing of 43.2% (vs. the MAS limit of 50%/banks’ limit of 45%) post FY23 revaluation loss of 7% y-o-y was better than expected. ICR ratio of 3.2x is above the 2.5x MAS floor.
- The REIT has a weighted debt expiry profile (WADE) of 2.7 years with US$75m (or 12.5% of loans) expiring in end-2024. As of 4Q23, KORE has close to S$43.8m in cash on the balance sheet.
- In terms of operational results, 2H23/FY23 net property income (NPI) was up 2.3%/2.2% y-o-y to S$42.2m/S$86.1m.
- After netting financing and operational expenses, distributable income was down 10% to S$26.1m, mainly due to higher interest costs.
Key Operational Highlights
- Portfolio occupancy remained relatively stable, trending down marginally to 90.7% from 91.2%. It has commendably kept occupancy above 90% in FY23, given the challenging US office sector.
- KORE recorded FY23 rental reversions of -1.8%, mainly due to Spectrum’s renewal/expansion. Excluding Spectrum’s lease renewal, FY23 reversions were at +0.9%. 4Q23 reversions were -4.4%, mainly due to the renewal of a lease of a tenant at The Plaza Building.
- The leases expiring in FY24 (9.7% of CRI) are mainly from The Plaza Building and Westpark. Management expects some potential vacancy at The Plaza Building, which may impact occupancy, slightly reducing it to 88% in FY24, which is still at a good level given the headwinds hitting the sector.
- Physical occupancy at KORE’s properties were at 57.5% as at end-2023, remaining higher vs. gateway cities’ <50% and second tier cities’ c.50%.
- Management expects average interest costs could creep up marginally to 4.3% to 4.4%, post the early refinancing of loans due in 2024 and 2025.
- Management does not intend to cut management fees.
Downgrade to FULLY VALUED; TP of US$0.10. We downgrade our rating to FULLY VALUED from BUY and lower our TP to US$0.10. We pegged our TP to 0.15x P/B to factor in the suspension of distribution and higher capital management risks.
Despite operational & financial metrics coming in line with estimates, we were surprised by management’s decision to suspend dividends for 2H24 up to end-2025, which we see as a conservative and proactive stance taken to manage its financial liquidity situation. We believe that the manager is probably proactively building up further liquidity to refinance its near-term debt expiry in case there is a “funding gap” when refinancing discussions start sometime in the coming quarters. We believe that this strategy of a dividend suspension will come as a surprise to unitholders during the execution of its recapitalisation plan, and the stock will remain under pressure in the interim.