"This, coupled with the lack of a clear visibility on dividend payout ratio and higher capex demand have dimmed the near-term catalysts for KORE despite trading at a huge discount of more than 70% to book value," states Natarajan in his April 21 note.
No thanks to higher free rents, 1QFY2025's distribution income dropped by 19.3% y-o-y to US$9.6 million, which missed expectations.
As a recap, KORE unit holders at a recent EGM have approved amendments to its trust deed, giving the manager the flexibility to change the payout ratio from at least 90% to anywhere between 0% and 100%.
"The trust deed changes come in light of persistent uncertainties in the US office market, higher capex requirements, as well as challenging bank financing environment. KORE's existing tax-efficient structure will not be impacted by the trust deed changes," says Natarajan.
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For KORE, key factors that will determine the payout ratio moving forward include asset valuations, capex, tenant incentive needs, and normalisation of financing conditions.
The REIT's manager, according to Natarajan, plans to restore a small payout, potentially earlier by end-2HFY2025 if market conditions stabilise. KORE's distributions have been halted since the 2HFY2023.
For now, his assumption is a distribution of 50% for FY2026 and 60% for FY2027, and none for the current FY2025.
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Meanwhile, KORE's portfolio occupancy for 1FY2025 has held relatively stable at 89.1%, down just -0.9ppt over the preceding 4QFY2024.
Natarajan points out that there will be additional vacancies but the manager is confident of backfilling and has maintained its guidance of a high 80% portfolio occupancy by the end of 2025.
According to Natarajan, the economic uncertainties from Trump's tariff policies have so far not impacted US office demand and management sees limited impact to its top 10 tenants.
One of the government lease renewals delayed because of cost-cutting measures has since been restored as it caters to critical function.
"Near-term office demand is likely to pause or slow down in our view from increasing uncertainties although the onshoring of jobs and businesses to the US will be a positive long-term demand catalyst," says Natarajan.
KORE has also kept its capex guidance at US$50 million for this FY2025, plus an additional US$40 to US$50 million for the coming FY2026, which is higher than Natarajan's earlier expectations.
The REIT has some US$60 million in debt up for refinancing in 4QFY2025, and Natarajan estimates its financing costs to be around 4.7-4.8% for FY2025.
Taking into account lower occupancy and lower margins but higher interest costs, Natarajan's revised target price is pegged at 0.3x FY25F P/BV, a lower multiple from 0.4x previously.
KORE units changed hands at 18 US cents as at 4.53 pm, up 2.79%.
