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Keppel Pacific Oak US REIT suspends dividends. What should investors do?

By Beansprout • 15 Feb 2024 • 0 min read

Keppel Pacific Oak US REIT (KORE) has announced that dividends will be suspended. We analyse what may come next for the US office REIT.

keppel pacific oak us reit kore share price dividend feb 2024

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What happened?

Another US office REIT has suspended dividend payouts. 

Keppel Pacific Oak US REIT (KORE) announced that distributions will be suspended starting from 2H 2023 through to the end of 2H 2025.

Earlier, Keppel Pacific Oak US REIT had postponed its earnings release from 31 January 2024

This led to a plunge in its share price by close to 40%, to close at S$0.151 on 15 February 2024.

keppel pacific oak us reit kore share price feb 2024

With the sharp correction, Keppel Pacific Oak US REIT’s share price has fallen by close to 60% over the past one year to reach an all-time low. 

keppel pacific oak us reit kore share price feb 2024

Let us find out what is driving the weakness in Keppel Pacific Oak US REIT’s share price, what it means for investors. 

What investors need to know about Keppel Pacific Oak US REIT 

#1 – Net Property Income remained healthy 

Keppel Pacific Oak US REIT’s net property income (NPI) experienced a growth of 2.2% for FY 2023.

This was supported by a relatively resilient portfolio occupancy rate despite challenges in the US office market that began in 2020.

The occupancy rate remained robust at 90.3% as of end-December 2023, compared to 91.4 as of September 2023. 

us office s-reits occupancy
Source: Keppel Pacific Oak US REIT investor presentation slides

Certain markets like Seattle – Bellevue/Redmond and Orlando contributing significantly to leasing activities.

Keppel Pacific Oak US REIT reported a negative rental reversion rate of -1.8% for FY 2023.

This was mainly due to specific renewal activities where there was some pressure on rental growth.

keppel pacific oak us reit stats
Source: Keppel Pacific Oak US REIT investor presentation slides

Keppel Pacific Oak US REIT also faced increased financial costs. This was primarily due to rising interest rates and the recapitalisation plan's impact, which necessitated a focus on managing leverage and interest coverage ratios within regulatory and banking covenants.

With the increase in finance costs, Keppel Pacific Oak US REIT’s income available for distribution fell 10.1% year-on-year to US$26.1 million.

#2 - Leverage rate rose to 43.2%

Keppel Pacific Oak US REIT’s leverage rate increased to 43.2% from 39.1% as at 30 September 2023. 

Earlier, the REIT had announced that its portfolio valuation had declined by 6.8% or US$97.1 million compared to the previous year’s valuation.

This would bring its total portfolio valuation to US$1,326.3 million as of 31 December 2023. 

keppel pacific oak us reit portfolio
Source: Keppel Pacific Oak US REIT investor presentation slides

About 12.5% of Keppel Pacific Oak US REIT’s debt is due for refinancing in 2024, with another 25.7% due for refinancing in 2025. 

keppel pacific oak us reit debt
Source: Keppel Pacific Oak US REIT investor presentation slides

#3 - Recapitalisation plan announced

Keppel Pacific Oak US REIT has announced a recapitalisation plan to ensure that its leverage and interest coverage ratio are within regulatory requirements and banks’ expectations.

As a recap, the Monetary Authority of Singapore (MAS) and bank covenants limit Keppel Pacific Oak US REIT to a 50% leverage.

At the same time, Keppel Pacific Oak US REIT has indicated that banks are reluctant to extend borrowing above the 45% leverage ratio due to its exposure to the US market. 

With the increase in leverage to 43.2% as at December 2023, this leaves little room for Keppel Pacific Oak US REIT to manoeuvre in the coming years. 

This is especially so as there might be more capital requirements to keep its office buildings competitive and retain tenants. 

As such Keppel Pacific Oak US REIT has announced a suspension of dividends beginning 2H 2023 through the 2H 2025 distribution that would otherwise be paid in 1H 2026.

Some of the other options that were explored include divestments, equity fund raising and reduction of distributions.

However, the REIT manager believes that divestments are not possible at this point because of the difficult US office market. 

At the same time, an equity fund raising is unlikely to raise sufficient capital to resolve leverage concerns. 

On the other hand, the manager believes that the suspension of distributions would provide more capital over two years than an equity fund raising would be sufficient to raise today. 

What would Beansprout do? 

Keppel Pacific Oak US REIT’s suspension of dividends may come as a surprise to many, especially since its portfolio occupancy and leverage ratios are better than the other US office REITs. 

Earlier, we have already seen Manulife US REIT halt its distributions after it breached its a financing covenant.

The suspension of dividends reflects the significant challenges faced in the US office market, such that the manager of Keppel Pacific Oak US REIT has decided to plan for the contingency of potentially lower asset valuations. 

Naturally, this has also affected sentiment towards other REITs with significant US assets, with Prime US REIT declining by 32%, Manulife US REIT declining by 7%, and United Hampshire US REIT declining by 4%. 

With the suspension of dividends for at least the next two years, investors who are looking to Keppel Pacific Oak US REIT for a regular dividend payment may have little reason to hold on to the REIT. 

In fact, given the dire outlook, we would consider avoiding REITs with exposure to the US office market for now.

To compare and select the best office REIT for your portfolio, check out our REIT tool. 

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This article was first published on 15 February 2024 .

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