Keppel Pacific Oak REIT- Latest Proposed Change To Trust Deed To Pave Way For Reinstatement of Distribution and Potential 22% Distribution Yield.

Keppel Pacific Oak REIT ("KORE") along with the other US office commercial REITS have been in the doldrums for the past few years. The work from home trend since COVID had a devastating effect across the entire US office REITs with some on the brink of bankruptcy from low tenant occupancy. Anti-inflation measures with high interest rate hikes by the US Fed further worsen the woes of US Office Commercial REITs. With the announcement by Donald Trump and many US business leaders such as the chief of JP Morgan to be back office, there are finally green shoots of recovery emerging. But the light at the end of the tunnel may not appear so fast for US Office REITS as US seems to be entering into a recession.

1. Gap Between High Net Asset Value Per Unit to Market Price Per Unit is Insanely High. 

Interestingly, market is viewing KORE as extremely risky with Net Asset Value ("NAV") at US$0.69 per unit as at 31 December 2024 while market price is US$0.205 per unit which represented a whopping -70.3% discount from NAV. Even if the current market price climb 100%, to US$0.410 per unit, KORE will still be at another significant discount of -40.6% to NAV. The extremely high risk premium is not surprising in the context of high leverage of 43.7% albeit 1 years plus of retaining all distributions to boost equity as well as the ever decreasing gross rental income collection reflecting that the US office industry is still in trouble. 

In addition, by now, I think many retail investors would have realised the hidden danger for investing into US Commercial REITS, that is, during crisis, rights issue to recapitalise the REITs will not be possible. The only proven way out are either (i) selling properties during crisis at fire sales price or (ii) reduce or suspend distribution to raise the cash position for CAPEX and working capital. For those interested on the technicality, you can read this post- "Updates on United Hampshire US REIT and Manulife US REIT- The Curse of the 9.8% Unit Holdings Limit Imposed On US REITs Sponsor."

2. Current Distribution Yield Assuming Stabilisation of Office Occupancy From Back to Office

Current income for distribution has unfortunately declined to US$47.6Mil for FY2024 mainly due to raging financing cost for its loans in the higher rate environment. Base on 1,044,450,000 units available as at 31 December 2024 and assuming 90% pay out upon restoration, this will mean a distribution yield of 22.24%.

3. Amendment of Trust Deed To Allow Smaller Amount of Distribution and Varied Frequency For Flexibility is Essential Step to Pave Way For Reinstatement of Distribution.

Extract of Current Terms of Trust Deed Before Proposed Amendment

Extract of Proposed Amendment To Trust Deed For "Flexibility"

The EGM seeks to amend the trust deed to give more flexibility in terms of distribution percentage of income as well as the frequency. This will be an essential step that is necessary for KORE to begin preparation for distribution restoration. 

Parting Thoughts

Overall, I view the proposed trust deed amendment as positive and also a potential signal that KORE management may start paying distributions earlier than the original planned 2026 by starting off with a smaller pay out ratio after getting unit-holders to bless the amendment to the original Trust Deed. Nevertheless, I am concerned on the tax transparency of such a move to vary payout below 90%. KORE has been rather silent on the regulatory tax exemption treatment for REITs in such scenario.