US Office REITs Recovery Play (KORE focus) And Disappointing Projected Distribution Yield Even If Full Payout Resumes-Part 2

Hi Folks, today let's do some stress tests on the expected distribution yield of Keppel Pacific Oak REIT ("KORE") once it resumes its distribution in FY2026. I know that there are many folks who have been holding on to their US commercial office REITs units since the pre-COVID days which also coincided with the then super low interest rate environment. There are also folks who have accumulated additional units of Manulife US REIT ("MUST"), Prime US REIT and also KORE to take advantage of the implosion in unit pricing at rock bottom while waiting for capital appreciation and dividends post recovery phase. KORE seems to be in a better shape than Prime US REIT and MUST from the key metric of occupancy rate and also leverage ratio. 

First and foremost, let's take a quick look at the recent announced cashflow of KORE 2nd half results before we annualised the numbers for analysis. The net operating cashflow from rental of offices has plunged from US$36.2Mil for 1H2024 to only US$29.8Mil for 1H2025. This is disastrous. This is a drop of <US$6.4Mil> rental income for half a year and if we annualised it, this will be precarious drop of <US$12.8Mil> in FY2025. 

Extract of Cashflow Statement 1H FY2025

Next, we will proceed to examine 3 different scenarios by assuming different level of CAPEX spending and the free cashflow available for distributions. 

1. Assuming CAPEX Required in 2nd Half 2025 is similar to 1st Half 2025

For this conservative scenario, the free cashflow is unable to sustain any payout unless KORE's management decided to go back to their own way of using borrowings to finance renovation to trigger off new leases or renewal of existing leases. 

2. Assuming CAPEX Required in 2nd Half 2025 same as FY2024 Full Year as Benchmark

Initially, as alluded to point 1 above, I thought that I was too conservative with the CAPEX of FY2025 when I annualised the half year released results of 30 June 2025. So I decided to just go back to FY2024 full year to use the CAPEX as benchmark to stress test the free cashflow available. Unfortunately, I got into a even bigger deficit of <US$18.4Mil>. 

3. Assuming CAPEX to Trigger off New Leases Already Done by 1H FY2025 and ZERO for 2H FY2025

If we can assume that KORE management has completed all the necessary renovation add on to their investment properties and that the CAPEX for 2nd half is zero, then we will have US$12.7Mil available for distribution in FY2026. This will be a sustainable 5.79% distribution yield under this relaxed assumption.

Parting Thoughts-Personal Thoughts

The expected sharp recovery in market price of KORE may not happen overnight albeit the 70% discount off its NTA per unit of US$0.70 as the probable distribution yield will be between 0% to 5.79% based on my projection if KORE decided to include in CAPEX and stop their unhealthy previous practice of paying for renovation using bank borrowings.