KEPPEL PACIFIC OAK US REIT (former Keppel-KBS US REIT)

Posting office US reit related news here as some comparison is used between Keppel US office reit vs Keppel Singapore office REIT

It seems markets are pricing in a distress level for US reits, based on previous dividends they are now yielding at 13-15% levels. As comparison, Keppel's US office reit is priced at 13% trailing dividend, while the Singapore REIT is priced at 5.1%. Price book has not much difference of 0.55 vs 0.62.

The difference in yields showcases the risk premieum faced for the US office space. Investors are probably expecting the US office reits to face a narrative of interest increasing faster than that at Singapore level, coupled with the large number of vacant office spaces in USA. Its interesting and fortunate that we have 2 similar REITs, managed by almost the same sponsor and in the same proeprty segement that we can measure the risk differential across them

KORE's properties are in the sunbelt cities. 

https://seekingalpha.com/article/4633601...s#comments

Summary

• The battered Office REIT sector has been the top-performing sector since June, lifted by a decent slate of earnings reports and recent indications that the long-awaited "Return-to-Office" is gathering momentum.
  

• Zoom - the "poster-child" of the Work-From-Home Era - became the latest high-profile company to implement a "RTO mandate" as cooling labor markets appear to be emboldening corporate decision-makers.
  

• The office outlook isn't as bad as market pricing reflects, but it's not necessarily good either, particularly for the highly-levered players and those focused in markets with long transit-heavy commutes.
  

• It's all about the commute: Work From Home ("WFH") is ultimately an 'economic' decision and several major markets (SF, NYC, CHI, DC) have an unavoidable structural issue: it takes too long to get to work - largely a byproduct of decades of bad housing policy and urban planning.
  

• Coastal-focused office REITs are no longer trading at deep discounts, but these discounts are still available for a handful of Sunbelt-focused REITs, which are well-positioned in markets with net population growth, shorter commute times, and a more favorable industry mix for the WFH era.
  

Market sentiments are important. In the US, the US office listed REITs are being valued at 0.4 P/B ratio with about 5.5% dividend yield.

Excluding Manulife, SG's US office REITs are priced at 0.25 times P/B ratio with 15% dividend yield. There is a large disparity between the Singapore and US companies in the same sector.

The locality of their properties and quality of the managers may be the X factor but Im not sure if it warrants such a wide valuation difference in Singapore and USA.

We may begin with the thought that Mr Market has priced the various US office REITs correctly, and then to move on to see if the hypothesis still stands.

SIAS is organising an event to speak with CEO and CFO

Details here

KORE mgmt has been doing relatively well, with spread out loan maturities, properties with strong tenancy, being transparent to the extent they reveal the interest rates of their loans (which the other 2 peers are not doing). They were the first REIT that moved to full cash payout because its share prices had dived too low and it did not want to excessively dilute unitholders.

This is a company that has nothing much to nitpick on. If the event is meant for us, they should invite the CEOs of most other REITs especially the foreign ones to learn from them

Thanks for that insight. Also noting that their properties are not near the coastal cities which are facing issues with renting out.

Following Manulife REIT, Keppel Pacific OAK US REIT also initiated its own 2.5year suspension of distributions. It seems like Mr Market was right on cue when it priced them at mid double digit teen yields.

Let's say, if a listed entity holding the properties is trading at 0.5x P/B and the property is sold at 0.8x P/B, value is actually created for shareholders (many folks may not agree to this, but it is what it is). So for KORE's case, if potential divestments are stated to be "not beneficial", does it actually imply that the true liquidation value of its property portfolio is actually lower than the deep market discount it is already trading at?

RECAPITALISATION PLAN AND SUSPENSION OF DISTRIBUTIONS

The Manager evaluated the various options available for such recapitalisation, including divestments of KORE’s properties, an equity fund raising (“EFR”), or a reduction of distributions to Unitholders.

With respect to: (a) potential divestments, the Manager believes that KORE will be unable to divest any properties at this point at a price that would be beneficial to KORE and its Unitholders because of the difficult US real estate market, (b) a potential EFR, based on indications provided by several bank lenders, the Manager is of the view that this is not a viable option given that an EFR is unlikely to raise enough equity capital in the present market environment to resolve KORE’s leverage concerns on a long-term basis and will result in KORE requiring to seek additional capital from Unitholders in the near future, and © a reduction in distributions to Unitholders, the drop in valuation of KORE’s assets as set out in the Valuation Announcement created a loss pursuant to which any distribution would be in excess of the combination of profits and the US$75 million loans due for refinancing by 4Q 2024.

Accordingly, the Manager has determined that it is in the best interest of KORE and its Unitholders to suspend distributions (“Suspension”) beginning second half of 2023. KORE expects the period of the Suspension will be through to the second half of 2025 in respect of distributions that would otherwise be paid in first half of 2026. The Manager believes that this option is expected to provide significantly more capital for KORE over the next two years compared to the capital that an EFR can raise in the current market condition.

https://links.sgx.com/FileOpen/KORE_SGXN...eID=786773

KORE's distributable income in the second half comes to US$26,111k.
I thought Reit is obliged to distribute at least 90% of the income? Instead, the DPU is suspended.
Can anyone enlighten me?

(15-02-2024, 05:24 PM)Shiyi Wrote: KORE's distributable income in the second half comes to US$26,111k.
I thought Reit is obliged to distribute at least 90% of the income? Instead, the DPU is suspended.
Can anyone enlighten me?

That is if you want to get tax transparency treatment from IRAS. However their income and assets are based overseas and they will not benefit from it.

(15-02-2024, 07:19 PM)r0n Wrote:

(15-02-2024, 05:24 PM)Shiyi Wrote: KORE's distributable income in the second half comes to US$26,111k.
I thought Reit is obliged to distribute at least 90% of the income? Instead, the DPU is suspended.
Can anyone enlighten me?

That is if you want to get tax transparency treatment from IRAS. However their income and assets are based overseas and they will not benefit from it.

Not obliged but incentivised to take advantage of the tax shelter but astounding point on overseas income is not subject to the shelter