Keppel Pacific Oak (KORE) Suspension of Dividend- A Too Cautious Move

In the latest financial result, KORE announced the surprise of suspension in dividends. The REIT elaborated it had considered other avenues such as fund raising and sale of building, but they were not beneficial to Unitholders. While the REIT is rational, I feel the REIT is being too cautious with its cashflow.

Debt Profile

KORE has US$78 mil of debt due in 4Q2024. With a cash generation ability of US$77 mil, expected CAPEX of US$30mil and cash balance of $43.7 mil, KORE is too cautious with expectations it is unable to refinance its tranche due in 4Q2024. With its cash flow and cash balance, KORE can repay in full without going to the bank.

KORE Cashflow is US$77 Mil per year

Effects of Full Repayment

Assuming a full repayment of US$70 mil at end 2024, KORE leverage will fall to 38.2% (barring further valuation fall). This I feel shows KORE is too cautious. It could have paid out a bit of dividend and maintain leverage at 41.0%, refinance 50% of the debt due in end 2024, it will still be below the 45% leverage ratio it fears of breaching.

Net Property Income (NPI) has remained stable

KORE NPI has increased slightly and I forsee for 2024, it will remain stable with slight uptick. With a cash generation ability of US$77 million (before interest expense), the REIT will be stronger. I am biased because I own KORE but what I have described is based on empirical reporting of its financials. KORE has only about 27.5% of leases due until end 2025, hence I feel the risk of its financials deteriorating is rather low.

KORE is Going to be Low Levered 

If KORE keeps saving aside US$45 million per year; in 2.5 years, the REIT will set aside US$135 million. It has US$601.9 million of debt. This means in 2.5 years; it will be able to repay 22% of its debt without refinancing. Assuming property and asset base valuation of US$1,350 million with little revaluation and debt position of US$466 million, KORE will be 34.5% levered at end 2025. This makes it one of the lowest levered REIT in the SGX REIT space.

What I Feel Will Happen

Again my biased view, I feel KORE will resume dividends from the start of 2025. The chief reason is that its leverage will be far from 45%. KORE is being very cautious to stop dividends until end 2025. Based on its current trajectory, KORE has provisioned for a further 20% drop in real estate commercial value. If Manulife US REIT CEO and PRIME CEO views are considered with both saying we are at the bottom of the cycle, KORE is being too cautious.

Amount of Reinstated Dividends

This is where I feel KORE must be careful. Based on its cashflow, it is apparent KORE is only able to distribute about US$40 million in dividend to unitholders. It must set aside CAPEX to ensure its buildings are in good conditions. Even if finance expenses are lower due to dropping interest rates, US$50 million should be the maximum sustainable level. This translates to about US$4.5 cents in dividends per year.

With the above overview, I feel KORE is a 9-10% dividend yielder if it executes well. From the above empirical observation of its financials, there is a low probability KORE needs equity fund raising or sale of building. With good execution and barring a sudden deterioration of market valuations, KORE should be able to return 4.5 US cents annually to unitholders post 2025 or even in 2024. A fair value of 45 US cents value is where KORE should be.

KORE is too cautious in how it is controlling its cash. It could continue to pay a small amount of dividend. With what it is doing, it will generate US$40 million in cash annually which it is keeping for rainy days. KORE is too pessimistic, and I hope when the storm clears, KORE does not use the spare cash to lever up by buying new buildings. It is a dumb move to buy new buildings at low cap rates due to an upturn.