UOB Kay Hian Private Limited
Date of Report: Wednesday, 30 July 2025

Keppel Pacific Oak US REIT: Earnings Recovery and Gradual Payout Restoration Signal Upside Potential in 2025-2027

Overview: A REIT Positioned for Recovery and Growth

Keppel Pacific Oak US REIT (KORE), listed under the ticker KORE SP, specializes in a diversified portfolio of income-producing office real estate assets across eight thriving US markets: Seattle – Bellevue/Redmond, Austin, Denver, Nashville, Houston, Dallas, Orlando, and Sacramento. With 13 freehold office buildings and business campuses, KORE targets growth cities propelled by innovation and technology.
Current Share Price: US$0.22
Target Price: US$0.24 (Upside: 9.1%)
Market Cap: US$229.8 million
Major Shareholders: Hillsboro Capital (8.7%), Temasek Holdings (7.2%)
FY25 NAV/Share: US$0.72
FY25 Net Debt/Share: US$0.55
52-week High/Low: US$0.285 / US$0.162

1H25 Financial Results: Signs of Stabilization and Positive Reversion

KORE reported a distributable income of US\$19.9 million for 1H25, representing a 16.2% year-over-year decline. This performance aligns with expectations and reflects the temporary suspension of distributions due to an ongoing Recapitalisation Plan.

• Gross Revenue: US\$74.6 million (+0.2% YoY), aided by a positive rental reversion of 3.3% in 2Q25.
• Net Property Income (NPI): US\$40.7 million (-3.2% YoY), with NPI margin narrowing by 2ppt YoY to 54.5% due to higher repair and maintenance expenses and increased free rents.
• Adjusted NPI: US\$41.4 million (-4.6% YoY), excluding non-cash adjustments like straight-line rent and lease incentives.
• Finance & Trust Expenses: US\$16.1 million (-3.4% YoY).
• DPU: 0.0 US cents (distribution suspended for 2024 and 2025).

Operational Highlights: Leasing Momentum and Tenant Expansion

– Rental Reversion: Turned positive at +3.3% in 2Q25, reversing previous declines. – Leasing Activity: 281,230 square feet of office space leased in 1H25 (5.9% of portfolio NLA). – Tenant Mix: Technology companies driving 17.1% of leases signed in 1H25 through expansions, with five significant expansions across Denver, Bellevue, Austin, and Houston. – Renewals & New Leases: 47.6% of leases were renewals, and 35.3% were new leases. – Portfolio Occupancy: Slight dip to 88.2% in 2Q25, with management targeting mid-to-high 80% by end-2025. – Vacancy Backfilling: Proactive engagement with tenants to address known vacates (170,000sf) across The Plaza Building (Bellevue), Westmoor Center (Denver), and Iron Point (Sacramento). Healthy demand observed for spec suites and vacant space.

Financial Forecast and Key Metrics

Balance Sheet and Debt Profile

• Aggregate Leverage: Stable at 43.7% (as of June 2025), outperforming many peers.
• Average Cost of Debt: 4.45% in 2Q25, expected to rise to 5.0% by end-2025 as a US\$100m interest rate swap expires in 3Q25.
• Interest Coverage Ratio: Healthy at 2.5x.
• Debt Maturity Profile: Well-structured, with significant maturities spread across 2025-2029.

Geographical and Industry Diversification

Geographical NPI (as of June 2025):

• Seattle – Bellevue/Redmond: 47.0%
• Austin: 7.0%
• Denver: 11.9%
• Houston: 10.3%
• Sacramento: 1.4%
• Orlando: 7.2%
• Dallas: 10.0%
• Nashville: 5.2%

Industry by NLA:

• TAMI (Technology, Advertising, Media & Information): 43.4%
• Professional Services: 21.3%
• Medical & Healthcare: 8.1%
• Finance & Insurance: 14.4%
• Others: 12.8%

Top 10 Tenants (by % of Cash Rental Income, June 2025)

• BAE Systems
• Comdata
• Spectrum
• TerraPower
• Gogo Business Aviation
• Lear Corporation
• Highridge Medical
• Meta
• United Capital Financial Advisor
• Bio-Medical Applications

Outlook: Improved Demand, Path to Distribution Resumption

Market Sentiment and Office Demand: – Office demand is poised to rebound in 2H25, supported by improving business sentiment and easing trade tensions. – Tenant requirements rose 5.8% QoQ in 2Q25, hitting their highest since 4Q21. – Major corporations—including Dell, Goldman Sachs, JPMorgan, and Amazon—are leading the return-to-office trend, diminishing the risk of mass lease terminations or downsizing. – Office traffic now stands at 72.6% of pre-pandemic levels (mobile phone data), while physical occupancy for KORE’s portfolio has climbed to 77% of pre-pandemic levels.
Distribution Resumption:
Distributions were suspended for 2024 and most of 2025 as part of a Recapitalisation Plan.
Management signals a phased restoration of payout ratios, beginning with a low payout in 2026 and gradually rising to 80-90% over several years.
Potential for a token distribution in 2H25 if refinancing requirements are met.
Hypothetical payout path: 20% in 2026, rising by 20ppt per year to 40% (2027), 60% (2028), and stabilizing at 80% (2029).

Valuation and Recommendation

– Recommendation: Maintain BUY – Target Price: US\$0.24, based on DDM (cost of equity: 10.0%, terminal growth: 0.5%). – Distribution Yield: Forecast at 5.3% (2026) and 7.8% (2027). – Key Catalysts: Growth in Sun Belt and 18-hour cities, technology-driven tenant expansions, built-in 2.6% annual rental escalations.

Key Operating Metrics (Recent Quarters)

Conclusion: Gradual Recovery, Attractive Value, and Resumption of Distributions Ahead

Keppel Pacific Oak US REIT is strategically positioned for a multi-year recovery, supported by resilient financials, improving leasing momentum (especially from technology tenants), and a prudent approach to restoring distributions. The REIT trades at an attractive valuation with substantial upside as payout ratios normalize and office demand continues to rebound in key US growth cities.