Company Overview

Keppel Pacific Oak US REIT (KORE) is a real estate investment trust that focuses on income-producing office properties across key growth markets in the United States. Its investment strategy is centered around cities known for innovation and technology, targeting markets such as Seattle, Austin, Denver, Nashville, Houston, Dallas, Orlando, and Sacramento.

The REIT owns a portfolio of 13 freehold office buildings and business campuses spread across these key cities. It benefits from a diversified tenant base, with significant exposure to the technology, advertising, media, and information (TAMI) sector (41.9%), along with professional services (21.5%), finance and insurance (14.7%), medical and healthcare (9.1%), and other sectors (12.8%)​.

Recent Financial Performance (2H24)

Key Results

• Gross Revenue: US$72.1 million (declined by 3.7% YoY) due to higher repair and maintenance costs.
• Net Property Income (NPI): US$36.3 million (down 14.1% YoY).
• Adjusted NPI: US$40.0 million, excluding non-cash adjustments such as lease incentives.
• Finance & Trust Expenses: Increased by 9.7% YoY due to rising interest rates.
• Distributable Income: US$23.8 million, reflecting an 8.8% YoY decline.
• DPU (US cents): 0.0, as distributions were suspended in 2024 and 2025 due to the Recapitalisation Plan​.

Operational Performance

Occupancy and Leasing Trends

• Portfolio occupancy improved by 1.3 percentage points (ppt) QoQ, reaching 90.0% in Q4 2024.
• Bellevue Tech Center (Seattle) saw an 8.3ppt increase in occupancy, reaching 95.6%, driven by TerraPower’s expansion (18,000 sqft) and new tenants in the medical and technology sectors.
• Maitland Promenade (Orlando) increased occupancy by 4.6ppt to 92.8%, supported by the addition of a new pharmaceutical tenant​.
• Overall positive rental reversion of 1.7% in Q4 2024, reversing a negative 1.2% reversion for 9M24.

Market and Industry Trends

• Leasing volume reached 938,655 sqft in 2024, equivalent to 19.6% of KORE’s portfolio net leasable area (NLA)—the highest level since the COVID-19 pandemic.
• Sun Belt markets, including Texas, North Carolina, South Carolina, Florida, and Tennessee, saw strong leasing demand, recovering to 95% of pre-pandemic levels in 2H24.
• Gateway markets (Seattle, Denver, etc.) are also recovering, with leasing activity at 76% of pre-pandemic levels​.

Portfolio Valuation and Leverage

• The portfolio valuation remained stable at US$1.3 billion, despite a fair value loss of US$46.7 million from capital expenditures and tenant improvements in 2024.
• Aggregate leverage increased slightly to 43.7% (+1.1ppt QoQ).
• KORE completed early refinancing of US$60 million in loan facilities, keeping the average cost of debt stable at 4.45%.
• The interest coverage ratio remains healthy at 2.6x, though it is expected to decrease slightly as borrowing costs rise​.

Outlook and Investment Strategy

Strategic Adjustments

1. Suspension of Distributions for 2024 and 2025
   • KORE has opted to suspend distributions until 2026 as part of its Recapitalisation Plan to strengthen its balance sheet and manage debt.
   • This move aims to reduce risk by funding capital expenditures (estimated at US$50 million in 2025) internally, rather than increasing leverage​.
2. Work-from-Office Recovery Trend
   • Large corporations, including Amazon, JPMorgan, and AT&T, have reinstated office-based work policies, creating increased demand for office space.
   • The U.S. federal government is also leading efforts to bring back the five-day office workweek, which should benefit KORE’s assets in key office markets​.
3. Physical Occupancy Trends
   • Physical occupancy in KORE’s buildings reached 72% in Q4 2024, reflecting hybrid work patterns.
   • Management expects physical occupancy to normalize between 70-80% in 2025, further supporting rental income stabilization​.
4. Projected Portfolio Occupancy
   • Some known vacancies in 2025 (e.g., Westmoor Center, Denver: 100,000 sqft; The Plaza Buildings, Bellevue: 40,000 sqft) may temporarily lower occupancy to 88-89% before rebounding.
   • Rental reversion for 2025 is expected to be within -5% to +5%​.

Valuation and Recommendation

• KORE currently trades at a P/NAV of 0.35x, reflecting a 65% discount to its NAV per unit of US$0.69.
• The 2026 distribution yield is projected at 15.6%.
• Target price: US$0.33, based on a Dividend Discount Model (DDM) with a cost of equity of 10.5% and terminal growth of 0.5%.
• Recommendation: Maintain BUY​.

Investment Risks

• Interest Rate Sensitivity: Higher interest rates could further increase finance expenses, affecting distributable income.
• Hybrid Work Challenges: Although physical occupancy trends are improving, some firms continue to downsize office spaces, creating potential lease renewal risks.
• Execution of Recapitalisation Plan: KORE’s decision to suspend distributions until 2026 could impact investor sentiment in the short term.

Conclusion

Keppel Pacific Oak US REIT presents a compelling deep-value opportunity in the U.S. office REIT space. Despite temporary headwinds from higher interest rates and the shift in office leasing dynamics, the REIT has demonstrated resilient occupancy, stable valuations, and a clear strategy for balance sheet recapitalization.

The anticipated resumption of distributions in 2026, attractive valuation (P/NAV 0.35x), and potential for rental recovery in key Sun Belt markets make it a strong long-term investment proposition.

Overall, KORE remains a BUY with a target price of US$0.33, representing a 37.5% upside from its current share price of US$0.24.​.

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