Interest Rate Hikes End: Will PRIME and Keppacoak REIT Regain its Highs

The dust has settled on the US Central Bank's decision. While it has not yet been cast in stone, the market expects the 5.25%-5.50% rates to be the peak of this cycle with a gradual return to the 2.5% interest rates. Next year end, it is expected rates will be at 4.5%-4.75% level; the same level as it was in March 2023.

Will US REITs PRIME and KORE return to March 2023 Levels?

The stock market is a forward looking indicator. With knowledge of further rate cuts penciled in beyond 2024 and that it is taken down to 2.5% interest, I do believe that in Dec 2024, assuming 3 rate cuts do happen, PRIME and KORE will indeed return to its share price on March 2023- 36 US cents and 44 US cents for PRIME and KORE respectively.

What Makes Me Convinced

One of the key reasons why PRIME and KORE started to tank in August 2022 was the market relisation that the Fed was on a path of dramatic rate hikes to combat inflation. US REITs borrow based on the SOFR which is pegged to the US Fed announced rates. 

In August 2022 with no end in sight but multiple rate hikes and not at 25 basis points, the borrowing cost faced by both PRIME and KORE was increasing month on month. People had grounds to be afraid that eventually the interest would outweigh the property income and in turn affect DPU.

Fortunately with rate hikes now at a pause mode, we know how much interest expenses these 2 REITs have to bear. To add to that, both REITs were lucky to have hedged their SOFR options with PRIME being lucky that most expires in July 2024. In a way, just a slight misstep and PRIME could be facing a devestating interest expense when it had to renew its debt.

Future DPU

While both REITs are paying 5 US cents per year, I do not think both will continue that amount. For PRIME, because it faces an impending revaluation exercise at a higher cap rate, it will be walking a tightrope in ensuring it does not breach the 50% leverage ratio when all its properties are expected to reported a lower property value. Likely PRIME will be announcing a 90% payout ratio instead of 100%, hence I expect a 4.5 US cents dividend announcement for years to come.

At 36 US cents, a 4.5 cents dividend is still commendable (12.5 % yield). For KORE, it may reduce or maintain its 5 US cents payout, but I think Keppel has done a commendable job in ensuring its properties remain strongly tenanted. In terms of occupancy, Keppel's KORE outranks PRIME and Manulife US REIT. Hence even at 5 US cents and expected share price of 44 US cents, KORE is still a good dividend machine.

Nevertheless, this is what I expect PRIME and KORE's price to be end 2024 - 36 US cents and 44 US cents. However with knowledge that SOFR/Fed Fund rates are going to be lower beyond 2024 and if the inflation story does not change, I will not sell PRIME and KORE at these prices. This is because with lower interest rates, their profitability will increase. 

PRIME and KORE are slated to become more than 5 US cents dividend yielders, therefore, I will keep them till the price is right; higher than what I expect for end 2024.

As for Alibaba, I am maintaining my lofty expectations that the shares will be USD$160. I was about my prediction in 2023 (in fact it went lower). But I am still maintaining this price for 2024. The company is very undervalued and I understand foreign funds are still selling it.