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

[weijian]

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

hi dreamybear,

Post Eagle Hospitality Trust, it is obvious that deep discounts cannot give a definitive answer as to whether there is sufficient MOS. For avoidance of doubt, I have to categorically state that KORE is not EHT.

Let's assume we value KORE based on liquidation value. There are multiple considerations that need to be accounted for:

(1) In a court auction, how much are those properties worth? (EHT is a good case study).

(2) What are the hidden liabilities? - Cost of breaking master leases (if any)? Any guarantees we do not know? What are the taxes, transaction fees involved in liquidating all the properties individually? And the the legal/wind-down fees to distribute the proceeds to equity holders.

(3) Take (1) minus the liabilities on the BS and then minus (2).

And I have no definitive answers to the above questions I posed.

[dreamybear]

@weijian

Thanks for pointing out the considerations. Hard numbers aside, "qualitative-wise", yeah, there are also uncertainties. But for KORE, well, we never know if certain entities will come and give it a lifeline. It is probably up to the OPMI to consider whether it is a worthwhile bet at a certain price.

[weijian]

@weijian

Thanks for pointing out the considerations. Hard numbers aside, "qualitative-wise", yeah, there are also uncertainties. But for KORE, well, we never know if certain entities will come and give it a lifeline. It is probably up to the OPMI to consider whether it is a worthwhile bet at a certain price.

I assume that you are inferring that the certain entity is local one of the 2 Sponsors of KORE.

In the first place, the local Sponsor has to answer to its own shareholders when considering whether to "give a lifeline". I remember Manulife US REIT shareholders were asking for similar and got this same cookie-cutter response. There might be a difference if it were local but would it be anything more than an insignificant difference? And, what is the future business model that this local Sponsor wants to pivot towards - asset heavy or asset light?

Creating a possible scenario that the local Sponsor will give it a lifeline is actually a very dangerous thought, regardless of how probable it is. OPMIs are better served leaving their hopes of a baby sitter, at home.

It is possible for an unrelated white knight to appear. Eg. Volare Group/Quarz Capital buying individual stakes in Sabana REIT or multiple parties bidding for SPH property assets. I figure the absence of such bidders (so far) speaks for the quality of KORE assets, or there is already plenty of supply at the auction court and so no need to submit an unsolicited bid? Anyways, the sponsors are still earning their fees and have rightfully justified it so in their presentation of stopping the distributions.

Besides buying assets, a white knight can also appear in the form of Mirae Asset Global Investments attempting to buy over the asset manager and then invest in Manulife REIT in early 2023. But these Koreans are doing it because they want to increase their AUM. So go figure if the current sponsors are ready to give up AUM.

[specuvestor]

Thanks donmihaihai /ghchua for the clarification. Yes indeed there's a taxation treaty between SG and US so income derived from US should be considered tax franked. I was thinking too much

So from KORE point of view there is no benefit from tax transparency as highlighted by r0n and if so if they don't payout the tax franked income it will be net negative to unitholders of a REIT but little incentive for KORE to do so

CY09 point on extra tax being paid by KORE if W8BEN is not submitted is also interesting that KORE should at least do minimal payout to incentivise unit holders to submit W8BEN

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.

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.

[CY09]

KORE is going to incur taxes in proportion to the number of unit holder who do not submit W8BEN or declare as US citizens.

KORE will withhold the entire distribution but is likely to incur a few hundred thousand in taxes. What is interesting now is that KORE has fallen to a 150 million market cap. With it's current cash reserves of US40 mil, KORE could use this chance to sweep up to 10% of its share base at P/B 0.2 times. But KORE is not doing it. Is it's finances so bad that it's not confident of refinancing the 70 mil due despite a cash flow ops generating ability of 77mil + 42 mil in cash? If yes, it is rather worrying. Either the REIT manager is poor in execution to take this chance of scooping its own shares or in reality KORE's asset quality is so bad that banks are not inclined to refinance despit it being the lowest leveraged among the 3.

[weijian]

US is a huge place with huge variations across states and cities, hence the aggregate data point of "most oversupplied" does not apply to every place. But for those who can visualize statistics, we can say that with this aggregate point, there are definitely cities/CRE which are much more severe in oversupply, and cities/CRE with moderate oversupply.

My guess is that insiders who are prudent enough, will know enough to hold properties in cities/CRE with "moderate oversupply". As for those cities/CRE which are "much more severe in oversupply", I think there are no surprises that the insiders will keep it off its books. On hindsight, if we look back to the IPOs for the 3 US office REITs below, all of them seem to cluster around ~3 years timeframe.

Manulife US Reit - May2016
Keppel Pacific Oak US Reit - Nov2017
Prime US Reit - July2019

US office market is world's most oversupplied, Brookfield tells MIPIM

“Per capita, it’s the most oversupplied office market in the world,” Bradley Weismiller, Brookfield’s managing partner for real estate capital markets, told the MIPIM property conference.

Office vacancy rates – at around 20 per cent in cities – are much higher in the US than in Europe. Concerns about lenders has hammered some regional bank shares this year.

https://www.businesstimes.com.sg/propert...ells-mipim