Keppel Pacific Oak US REIT’s (KORE) focus on improving its occupancy rate and reinstating its distributions in 2026 remains unchanged, says David Snyder, CEO of the manager. "Our portfolio is performing where we would expect it to, or maybe a little bit better. I mean, our leasing was very strong again in [the fourth quarter]," adds Snyder, who also serves as chief investment officer, speaking at the REIT's FY2024 results briefing.
"Interest rates are sort of where they're at [and] we've refinanced the loans that we needed to through the first quarter of 2025," he continues, adding that he had not seen anything that would change its original timeline to resume distributions.
Last February, the REIT announced plans to suspend distributions from 2HFY2023 to 2HFY2025 alongside a recapitalisation plan. At that time, its leverage had reached 43.2% following FY2023 valuations, nearing the regulatory limit of 50%. Its lenders, similarly wary of the US office market, were "reluctant" to lend to companies with leverage exceeding 45% in the US.
KORE's plans to recapitalise include maintaining its leverage within the Monetary Authority of Singapore's limits and bank debt covenants, avoiding selling assets at deep discounts to current valuations and refinancing loans due in 2024 and 2025 before they mature.
Other goals included investing in the portfolio to maximise its net property income (NPI), with a bid to restart distributions in FY2026 and, if market conditions allow, re-commence them at an earlier date.
When asked about the possibility of an earlier-than-expected resumption of distributions, Snyder suggests that the REIT would need to achieve a "significantly" higher portfolio valuation to reduce its leverage substantially. However, he notes that this is unlikely, as he has seen no indications this year that would prompt the REIT manager to bring forward its distribution timeline.
For FY2024, KORE's distributable income fell by 8.8% y-o-y to US$47.6 million ($64.2 million) due to higher finance costs and lower cash NPI. Its portfolio value, as of Dec 31, 2024, held steady at US$1.33 billion. Portfolio occupancy rose by 1.3 percentage points q-o-q to 90% as of Dec 31, 2024, while Snyder estimates the REIT's portfolio physical occupancy rate to range between 70% and 80%. "I think that's the right range, and [I think it's] hard to change a range like that, regardless of how many employers are bringing people back due to normal life and business sorts of circumstances," he says.
"So, if we're in that sort of that range, I think we're going to feel good about that towards the end of the year in terms of how best office is going to drive leasing occupancy."
Still, Synder is seeing a pick-up in leasing volume and space taken, which is in line with overall US trends. "We should see that through all of 2025, and hopefully, we'll get acceleration during 2025."
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KORE reported negative rental reversions of 0.5% for FY2024, due mainly to renewals at The Plaza Buildings in Washington state and Westmoor Center in Colorado and offset by positive reversions of 1.7% by Maitland Promenade I & II in Orlando and One Twenty Five in Dallas.
Capex and financing
In FY2024, the REIT spent about US$47 million on capital expenditures, which is lower than the US$60 million it had previously guided. According to Snyder, the REIT has carryover capital from projects that have not been completely paid for.
The REIT's planned capex may be fully spent in 2025, although the CEO expects some of this year's payments, like some of 2024's payments, to carry over to 2026.
On a q-o-q basis, Snyder reveals that KORE's financing cost had lowered somewhat to stabilise at around the 4.5% mark. He goes on to explain that the drop this quarter was due to the Fed cuts, but it was offset by the higher loan margins that the REIT refinanced in the same quarter. The REIT also has over US$100 million worth of swaps, and when those roll off, the REIT manager will have to decide whether to do a new swap or let it become debt or floating debt first, says Andy Gwee, CFO of the manager.
He adds that the REIT's cost of debt may increase in 2025 and 2026 before stabilising thereafter. He notes that the new loans that are due to expire this year and next have margins of about 30 basis points (bps) to 50 bps higher than their original loans.
The CEO says the REIT does not intend to divest its properties in 2025. However, the REIT previously indicated it aimed to do so by 2026, which now appears to be a more feasible timeline.
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Snyder believes the trends are moving in a positive direction, with organisations like Blackstone planning to buy a sizeable stake in a 50-storey Midtown Manhattan building in New York and lenders that may be entering the market.
"That all bodes well for transactions picking up sometime, probably in the second half of 2025, which would be right on target for what we've kind of projected and talked to people about for the last year plus, which would lead to us being in a good place to divest a building or two in 2026 as we hoped to," he says.
Before anyone could raise the inevitable question about his 2025 rate expectations, Snyder replied that if he had the answer, he'd be "making a lot more money doing something else".
Even though the REIT has suspended its distributions till Dec 31 this year, the REIT manager has urged unitholders to submit their US withholding forms and certificates as KORE would otherwise have to bear the withholding tax on their behalf. During the call, Snyder warned that unitholders who didn’t submit their forms may have their distributions withheld even after payouts are resumed to pad up KORE’s costs.
