Keppel Pacific Oak Annual Report: Providing Insights into the Interest Cost of US REIT

Unlike most other US REITs which declare their loans as "SOFR + Margin", KepPacOak (KORE) does an investor friendly option of publishing the exact spread they pay their lenders for loans (before factoring hedging) based on SOFR. Below is KORE's debt interest profile:

Transparency of KORE and Its Use

For investors knowing the interest margin of a company's debt gives a lot more clarity for our projection and the effects to the interest coverage ratio. From the above data, we can gleam that for commercial REITs and pherhaps even Utdhampshire, debts are borrowed at least 1.5% spread from SOFR.

KORE has been excellent in its disclosure and I look forward to other REITs disclosing their borrowings with the same level of clarity. It allows us investors to quantify the risk we are taking when investing in each REIT

What Can Investors Learn from The Above Data

From the above, I can confidently say that if a US REIT does not hedge its debts, the likelihood is that its all in interest rate will be 6.9%.

For KORE, it has about 77% of its debts hedged to fixed rates and as a result reports an all in financing rate of 4.06%.

For REITs like Utdhampshire which has just renewed its debts and hedges, using KORE's data provides us an approximation of how high the interest on its debts would go post renewal. US REITs borrow in "SOFR+Margin". With 75% debts hedged, therefore we can expect the latter's REIT all in financing to be about 4.1%-4.2%; hence my revision to Utdhampshire's ICR would be 2.6 times at end 2023.

For PRIME, post its July 2024 renewal of loan and with 63% of debts hedged, I am expecting an eventual all in financing rate of 4.6%. ICR will likely decrease to a reported 2.7 times by end 2024.

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