Should You Invest In Keppel Pacific Oak US REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis and review of Keppel Pacific Oak US REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having a high degree of capital preservation ability.

Information Is Accurate Up To May 24

Business Description

Keppel Pacific Oak US REIT (KORE) is an office REIT that was listed in 2017 and owns 13 office properties in the United States.

What I Like About KORE:

The performance of the properties had remained resilient despite the ongoing woes in the US commercial property space.
Low tenant concentration risk as KORE has a well distributed and resilient tenant profile (Figure 13)
Well spread out lease expiry profile with a decent level of weighted average lease expiry (Figure 12)

What I Do Not Like About KORE:

The biggest risk for Keppel Pacific Oak US REIT is the sudden valuation decline because of broader market sentiment. This may force KORE to breach the bank covenants resulting in further complications despite the resilience of performances of their properties.
Unlike Singapore offices, the US office requires a substantial amount of capital to build out and lease office space because the landlords are responsible for the funding of tenant improvements, leasing commission and other costs.

Updates From Recent Performance (FY23 & 1Q24)

General Comments:

As of 15 February 2024, distributions are suspended as part of the recapitalization plan for the next three years (Till 2H 2025) as the management’s focus is on addressing the REITs capital needs and leverage concerns. This is done to avoid having to liquidate its existing assets or do equity fundraising, both of which are highly undesirable to unitholders given the current depressed market conditions.

Positive Headwinds:

A tighter labour market will support a move back to the office which should, in theory, help improve the overall occupancy rate.)

Negative Headwinds:

Post COVID, the work-from-home (WFH) trend is without a doubt, here to stay. Similar to what is happening in Europe, the nature of offices will change to adapt to a new lifestyle as more amenities and features will be demanded from tenants with office space now acting as an integrated space for lifestyle and work. This inevitably would put pressure on all commercial spaces that are unable to adapt to the changing trends.
Low demand for office space had resulted in an array of issues for the US commercial property industry with occupancy rate hovering around 50-60% coupled with a low bargaining power by the tenants during rental renewal. This resulted in several complications, namely the rapid deterioration of property valuation and the negative rental reversion (US Avg: -1.1%) which had caused worries over the REIT’s ability to refinance when debts are due (Banks are unwilling to lend above 45% leverage for the US markets) coupled with the worsening of performances and hence lower DPU.

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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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