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

KORE suspension of dividends has come as a surprise with the market putting it down by 50%. In my view, the REIT should now be viewed as an ordinary business. Taking a look at its cashflow statement, it has a cashflow generating ability of US$77 mil (after interest expense). With an expected CAPEX of US$35 mil per year, that mean FCF is about US$42 million. It is now valued at 3.3 times it P/FCF

In terms of its past cash distribution of about US$55 mil, it seems KORE might not be able to continue paying at such high levels.

(15-02-2024, 08:18 PM)specuvestor Wrote:

(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

Thank you for the explanation.

I take another look at the announcement. It appears that the DPU is suspended has little to do with tax shelter. Rather, its net income after accounting for fair value losses is negative.

The announcement has a footnote in small print: 
"... paragraph 7.3 of Appendix 6 to the Code on Collective Investment Schemes (“Property Funds Appendix”) which states that if “the manager declares a distribution that is in excess of profits, the manager should certify, in consultation with the trustee, that it is satisfied on reasonable grounds that, immediately after making the distribution, the property fund will be able to fulfil, from the deposited property of the property fund, the liabilities of the property fund as they fall due."

Hi,

I have enquired with Manulife US REIT on the effects of taxation after suspension of dividends. It is stated as below:

".....that actually there is no withholding tax impact on halting distributions, if all unitholders continue to submit their W8BEN forms. In the past, unitholders would incur withholding tax when they failed to submit their tax forms. Since the Manager is retaining the redistributions, the withholding tax burden of as much as 43% would fall on the REIT now instead of unitholders, and it will be calculated according to the percentage of unitholders that fail to submit their tax forms. Therefore, we will be doing investor education to remind unitholders to continue to submit their tax forms even in the absence of distributions until end-2025. You may refer to page 4-5 to the Circular for further details."

Effectively, you can see which REIT was proactive in sending W8BEN forms to know if they plan to withhold distributions. I received W8BEN form from KORE 2 weeks ago which suggested their plans. As for PRIME REIT, I have not received the W8BEN form which may suggest they dont intend to suspend dividends just yet

Interesting questions asked around fund raising, sponsor and even mgmt fee, etc.

I think an interesting question for OPMI - Wld there be further write-downs on the value of the properties ? How wld these impact the gearing level ? Given the share price drop and discount to NAV(US$0.69)*, is there a sufficient MOS ?
*https://www.koreusreit.com/file/downloads/2023/kore-recapitalisation-plan-and-fy-2023-results-slide-deck-15-feb-2024.pdf

-----------------

KORE's manager expands on rationale to suspend distributions, answers awkward questions during briefing
https://www.theedgesingapore.com/capital...-questions
"...As an example, CapitaLand Ascendas REIT A17U - ’s A17U -  detailed valuations in FY2023, released on Feb 1, indicated that its US portfolio, which comprises campus business, medtech and tech parks (like KORE’s) and logistics warehouses, had declined by 19% y-o-y.
Against this background, KORE’s 6.8% decline looked somewhat mild...."

https://www.businesstimes.com.sg/propert...alues-here
"THE shakeout in the US$20 trillion US commercial real estate market has long been delayed for a simple reason: No one could figure out just how much properties were worth...."

Weijian has words that I will now remember: "Assets on balance sheet will be reported to the fullest value they can be, liabilities on the other hand...."

It can be safely assumed that as the real estate commercial crisis continues, donwward valuation will occur. In KORE's rather detailed analysis, we can note a few things. While KORE has the highest occupancy among the 3 US Office REITs, the fact is they have the highest % of CAPEX spent per AUM among the 3. In a way, the cost of ensuring a strong occupancy rate is that KORE has been spending a lot on CAPEX. The benefit is that CAPEX does not subtract from "Distributable Income (DI)" while increasing rent adds to "Distributable income"; in this sense it helps KORE REIT manager to earn a higher manager fee. The 3 US REIT managers based their fees on the metrics of "Distributable income". If KORE REIT manager had been like PRIME and Manulife where CAPEX is lower and in turn reduces the occupancy rate, DI will be lower and KORE REIT manager will earn lower. This is what investors should evaluate and be aware. There is some financial engineering done by the REIT manager to ensure they are paid well.

Secondly, it seems among the 3 REITs, KORE bankers have given them the worst convenant ratios. KORE's convenant seems to be 45%, while PRIME's is 50% and MUST was 60% (before restructuring). If my deduction is right, this could be due to KORE putting in a relatively high amount of CAPEX each year (tends to be 1% higher in AUM compared to the other 2 each year) and then classifying it as "Additions to investment property" in the accounting statements. The bankers might be aware of the financial engineering KORE does and have placed more restrictive convenants.

Thirdly, while it does state KORE experienced a 6.8% decline in valuation, lest not forget they spent 3.2% in CAPEX to these buildings. So if we add item 1 and 2, we can expect the valuation decline to be about 10%. KORE is transparent in its disclosures which is good but it needs a lot of piecing of jigsaw pieces by investors

Dividend is suspended purportedly to preserve cash. However, the Manager opts for all cash for its fees instead of script. Sigh!

Yes I think too it is regrettable that the managers choose all cash rather than partial

Just for my understanding as I didn't read into KORE's announcements, I think REIT distribution is based on Distributable Income not Net income. In other words the clause on Net income is to alert the manager and trustee to be prudent in the distribution.

Then there is this section 5.3 on 90% of TAXABLE income to be paid out to enjoy tax transparency
https://www.iras.gov.sg/media/docs/defau...9897e04_27

So I figured that if you don't distribute 90% of your taxable income, the unit holders will have to pay tax on the income which is where the W8BEN comes in. So that's a consequence not the reason for not distributing

I'm also thinking about what r0n mentioned about income and asset being overseas. But in order to receive the past distribution the income would have to be repatriated onto Singapore's shores and that would be under IRAS tax transparency umbrella?

Eager to learn from other VB on this REIT topic

(16-02-2024, 01:29 PM)Shiyi Wrote:

(15-02-2024, 08:18 PM)specuvestor Wrote:

(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

Thank you for the explanation.

I take another look at the announcement. It appears that the DPU is suspended has little to do with tax shelter. Rather, its net income after accounting for fair value losses is negative.

The announcement has a footnote in small print: 
"... paragraph 7.3 of Appendix 6 to the Code on Collective Investment Schemes (“Property Funds Appendix”) which states that if “the manager declares a distribution that is in excess of profits, the manager should certify, in consultation with the trustee, that it is satisfied on reasonable grounds that, immediately after making the distribution, the property fund will be able to fulfil, from the deposited property of the property fund, the liabilities of the property fund as they fall due."

(16-02-2024, 02:00 PM)CY09 Wrote: Hi,

I have enquired with Manulife US REIT on the effects of taxation after suspension of dividends. It is stated as below:

".....that actually there is no withholding tax impact on halting distributions, if all unitholders continue to submit their W8BEN forms. In the past, unitholders would incur withholding tax when they failed to submit their tax forms. Since the Manager is retaining the redistributions, the withholding tax burden of as much as 43% would fall on the REIT now instead of unitholders, and it will be calculated according to the percentage of unitholders that fail to submit their tax forms. Therefore, we will be doing investor education to remind unitholders to continue to submit their tax forms even in the absence of distributions until end-2025. You may refer to page 4-5 to the Circular for further details."

Effectively, you can see which REIT was proactive in sending W8BEN forms to know if they plan to withhold distributions. I received W8BEN form from KORE 2 weeks ago which suggested their plans. As for PRIME REIT, I have not received the W8BEN form which may suggest they dont intend to suspend dividends just yet

I have not read into any of the KORE announcement or n detail on IRAS tax treatment for REIT, but a general understanding of taxation will be good.

IRAS has to right to tax any income derived from Singapore and overseas (after it was taxed overseas and such income doesn't always get taxed by IRAS, but that is another subject). With a Singapore structured REIT and any exemption granted, this is within the purview of IRAS.

Any income derives from a foreign country, such as USA has to be taxed by USA tax authority such as IRS, and any exemption given by IRS has nothing to do with IRAS.

W8BEN - https://www.irs.gov/pub/irs-pdf/fw8ben.pdf. Is about IRS not IRAS.

These should stand. And why on earth would IRS care about some REIT structure from Singapore.

(17-02-2024, 01:48 AM)specuvestor Wrote: So I figured that if you don't distribute 90% of your taxable income, the unit holders will have to pay tax on the income which is where the W8BEN comes in. So that's a consequence not the reason for not distributing

Hi specuvestor,

I think you have misunderstood. W8BEN have to be submitted for the US side for distributable income, regardless of whether the REIT declares a distribution or not. Which means, previously when the REIT declares a DPU, unitholders would also have to do the submission. Otherwise, they would have to pay US withholding tax for those distributions they received out from US.

Now that the REIT had suspended distributions, what they are advising unitholders is that they should continue to submit their W8BEN so that the REIT can retain more income. Otherwise, they would have to pay withholding tax for those retained distributable income even if they suspend distributions to unitholders.

As donmihaihai have explained, this W8BEN has got nothing to do with IRAS in Singapore. IRAS income tax structure for REITs is after those income had been received out from US.

With the REIT manager being the 1 who pauses the distribution, the withholdingt ax burden (which can go as high as 43%) of the income now falls on the REIT. To minimise the loss of income, the REIT has to find how many of its unitholders are US citizens via the W8BEN. If no one submits or all are US citizens, KORE/MUST has to pay 43% of its income to IRS.

It will be of course dumb if that happens, imagine unitholders seeing the dividends suspended and noticing 43% of the REIT income is taxed by IRS; the continuation of full payout would have been better since 43% will not go to IRS. To prevent such a castrophe in their financial statements, the onus is now on the REIT manager to proactively send out the W8BEN forms to check from its unitholders who are exempted. In MUST case, the effect of the REIT manager witholding distribution was 1% of their DI (about USD700k) was incurred as taxes to IRS.