Keppel Pacific Oak US REIT: Throttling The Payout Ratio Level

UOB Kay Hian | April 2, 2025

Keppel Pacific Oak US REIT (KORE) is seeking approval to amend its trust deed, providing greater flexibility in determining the amount of distributions. The manager aims to channel retained funds towards essential capital expenditures, ensuring the REIT’s aggregate leverage remains at a comfortable level amidst the current uncertainties in the US office market.

Proposed Trust Deed Amendment

The manager has proposed amending KORE’s trust deed to allow for a payout ratio ranging from 0% to 100% of distributable income, compared to the existing fixed minimum of 90%.
This new flexibility will enable KORE to allocate retained funds towards capital expenditures, including tenant improvements, leasing commissions, and other costs vital for retaining existing tenants and attracting new ones.
Financing these capex requirements solely through debt is considered unsustainable given the current high-interest-rate environment and uncertainties surrounding the US office sector.
The amendment will help KORE maintain its aggregate leverage at a comfortable level and reduce the likelihood of exceeding the 50% leverage limit, preserving a stronger balance sheet with adequate debt headroom.

Gradual Increase in Payout Ratio

We assume KORE will initially set a payout ratio of 30% in 2026, gradually increasing it by 15 percentage points per year to reach 45% in 2027, 60% in 2028, and stabilizing at 75% in 2029.
This phased approach allows KORE to strike a balance between retaining funds for essential capex and providing distributions to unitholders.
The potential earlier resumption of distributions in 2H 2025 might be a token amount, with the payout ratio likely below 50%.

Financial Implications

We have cut our DPU forecasts by 69% for 2026 and 52% for 2027 due to the lower payout ratio assumptions.
KORE is expected to provide distribution yields of 5.9% for 2025, 8.6% for 2026, and 11.2% for 2027, trading at a P/NAV of 0.29x (71% discount to NAV of US$0.69 per unit).

Maintain BUY, Target Price US\$0.24

The target price of US$0.24 is based on a dividend discount model, with a cost of equity of 10.0% and a terminal growth rate of 0.5%.
Key catalysts include growth from Supernovas, Super Sun Belt, and 18-hour cities driven by in-migration, as well as built-in average annual rental escalation of 2.6%.