I am just back Singapore today from my overseas business trip. During this past 1 week where I was super busy with work, it looks like a lot had happened in Singapore with the (i) sudden bombshell released by the management of Keppel Pacific Oak REIT (“KORE”) that they will halt all dividends payout for 2 years and (ii) the removal of CPF special account at the age of 55 by Mr Lawrence Wong, our deputy Prime Minister during his 2024 budget speech. The focus of this post will be on the disastrous announcement by KORE management that had sent shockwave among all of its unit-holders (as for the CPF Special and Retirement Accounts changes one can easily find many posts and comments on existing social media hence I will not be adding on to it).
1. Unexpected total halt in KORE dividends distribution.
To be honest, I was expecting a 50% reduction in dividend payout in order to have adequate funds on hand to pay off CAPEX and expiring bank loans. The 100% halt in distributions caught me totally off guard as I think that its latest year end financial results is actually decent with no breach in banking covenants and a respectable aggregate leverage ratio of 43.2% despite the turmoil facing US office REITs.
Nevertheless, I think that the tough measure seems to be the best option currently. At least KORE is not forced into selling off office buildings at a mammoth discounts to their current valuations (this is what happened to Manulife US REIT). Rights issuance at this juncture also will not work due to the rapidly spiralling downwards of unit price. The 9.8% maximum unit-holdings per unit-holder will also be an issue as it will be virtually impossible to get the sponsor to underwrite unsubscribed rights during an equity fund raising exercise from unit-holders. 3rd party bankers even if willing to take part will demand an exorbitant fees to take up unsubscribed rights.
2. Is the worst over or more bad news to come?
As alluded to point 1, the drastic rescue plan seems to be preparing for a dooms day scenario. There could be more bad news such as losing of key tenants or worsening occupancy due to the work from home trend and macro-economic recession risks. We have seen the REIT pricing collapsed by over 40% in a single day since the announcement of the recapitalisation plan.
If one cannot stomach the risks, then it is best to exit all office REITs including KORE.
3. Is it a good time to buy more of KORE?
The hard truth is that KORE has lost its economic moat with the move towards work from home by US businesses and its employees- this is most likely a permanent change.
Although I think that the current US$0.135 per unit as at 19 February 2024 is severely undervalued relative to its net asset value per unit of US$0.69 (this is an absurd market valuation at only 0.2 times of KORE's net asset value per unit), I will not be making any further long term placement into KORE or any US office REITs.
Parting thoughts
While I will not be making any further long term investments into KORE, I may be taking up a small short term speculative position towards the end of this week as I anticipated more irrational selling pressure and bloodbath when Prime US REIT released its results after the close of trading on 21 February (Wednesday). With the long delay in results announcement by Prime US REIT relative to prior year, I reckon that their management team are busy drawing up more drastic measures-rather than a simple dividend halt- to save itself from financial ruin. KORE and other office REITs will most likely be adversely affected by the extreme pessimistic market sentiment about to be unleased by Prime US REIT.
Do brace yourself for the impact and good luck to all existing retail investors of KORE.
Prime has $484mm or ~70% of their debt that matures in July... With the state of capital markets for US Office, I don't know if they'll be able to refinance this. This is a huge hurdle that can make or break the REIT depending on if they can find a solution or not.
ReplyDeleteIf we assume Prime's asset values decrease by 10%, they will be approaching 50% gearing. If they can only refinance at say, 40% gearing, they would need to come up with ~$140mm in cash. They had $15mm cash in H1 and halting dividends would only generate ~$30mm in H1 '24...
I consider Prime the riskiest among the S-REITs because of this - and believe we're likely going to see forced sales / very high cost debt / equity raise to bridge the gap and avoid maturity default.
What do you think?
Wow...thanks Austin for sharing your analysis and thoughts. Good one! I have to agree with your assessment.....same view....think Prime US REIT in trouble. Most likely they need to force sales 1 or 2 office buildings to pacify the bankers.
DeleteHi Blade, thanks for the concise summary of your thoughts on KORE's situation. I remember a few months back I was quite keen to dip my toes into the US Office space but in hindsight was glad I didn't judging from the price drop. The recent month has shown me that the market truly humbles all (With UtdHampshire's price languishing). I believe the halting of dividends is the most bitter yet most effective pill to swallow. It'll allow the REIT to build equity and only dispose of assets at an opportune time when interest rates start to normalise, still keeping an eye on this counter :)
ReplyDeleteHi Passive Loss mate, thanks for dropping by and sharing your thoughts! Yup, United Hampshire price hit US$0.510 just recently but retreated 10% since then....think maybe affected by the US commercial REITs of KORE and Prime.
DeleteBtw, I have just added in 39,000 units in KORE @ US$0.129 per unit (close to US$5K) for a short term speculative position as I believe that it will survive this 2 years while the US office sector recovers due to dwindling supply.
Heng never go in. I see how it fares for the 1st year before starting a small speculative position.
ReplyDeleteHi YX, good day to you. Good that you did not go in yet. There were a few folks that I knew went in during Sep’23 to Oct’23 trough period before the price rally sharply due to Fed Reserve announcing the stop in interest rate raise to combat inflation. However, the current catastrophic crash in price of US$0.124-US$0.130 range is the worst bottom ever for KORE and many back to square one or worst.
DeleteSeeing some green shoots based on Prime US REIT mgt presentation on office space supply dwindling and leasing demand momentum happening. But not 100% sure whether these are just for show to pacify investors and bankers or really turning around with absolute certainty. Yup, agree with you 1 more year maybe able to gain better clarity on the outlook for KORE. I only dare to put in a small additional amount of USD5K for now despite my belief that the probability of KORE survival and recovery is high.