Keppel-KBS US REIT (KORE) held its inaugural AGM yesterday afternoon at Suntec Convention Centre. It also announced its Q12019 results the day before.
KORE is one of my newer positions in the portfolio that has performed pretty well this year. Management had drawn a lot of flak due to its dilutive rights issue last year, as such I will need to keep a closer eye on this REIT. To do just that, I attended the AGM yesterday and here are some highlights.
Financial & Operational Performance
CEO David Snyder took the attendees through a slide deck during the meeting and also briefly talked about the Q1 2019 Performance.
Financials & Capital Management
2018
KORE delivered largely inline with IPO forecast, with the elephant in the room being the drop in DPU due to the dilutive rights issue mentioned earlier.
AGM regular Mano Sabnani posed some questions about the high level of property expenses, which accounts for 40% of revenues. When you dive in into the notes disclosure, the bulk of the expenses relate to property taxes ($12,709) and other property expenses ($11,578). When quizzed on the nature of other property expenses and the seemingly high property taxes, Management gave a very generic answer with regards to why it is so high.
Note to self to cross check these percentages to Manulife US REIT.
Q1 2019
Honestly, this slide is totally meaningless in terms of comparison due to acquisitions in Q4 2018 and Q1 2019. Just note the DPU of 1.5 cents which when annualised is about 8% based on 74.5 cents, yesterday’s closing price.
Debt Maturity is relatively healthy at 3.6 years with no much debt expiring in 2019-2020. Debt is about 77% fixed rate with interest coverage of 4.7 times. Average cost of debt stands at 3.76%
Gearing stands at 38.1%, still acceptable but on the high side, especially given the aggressive growth plans they have for the REIT, which I will cover later.
Portfolio Review
Portfolio Occupancy stands at 92.1%. Mr Snyder explains that the main reason for not pushing for 100% occupancy was to allow for the REIT to have more flexibility and participate in potential new tenancies, I guess this only makes sense if you are in a roaring bull market.
A unitholder asked about the relatively low occupancy Westmoor Centre and 1800 West Loop South and what management was doing about it. Mr Snyder mentions that those properties are suburban offices which need better amenities to attract tenants. Management has improved the property’s amenities like cafes. Ideally, Management is looking to fill out the property with a tenant who wants to set up a regional HQ.
Management also represented that their rents are still below market rents despite built in rental escalations. When I asked them about how much lower, they represented a figure between 10-15%, depending on the benchmark used to compare against. This seems unusually high to me, I will need to see if this really plays out in rental reversions.
Generally well diversified with minimal tenant concentration. WALE seems relatively long at 5.2 years, especially when compared to Singapore office tenancies.
US Office Market Outlook
Historical supply and adsorption of US offices in the last 12 months remain healthy with only 9.8% vacancy rate. One thing to note is the notable increase in Net deliveries in real estate in 2019 and beyond. This may apply downward pressure on rental reversions and new lease rentals going forward if the market is not able to absorb the supply.
That Rights Issue
Given the dilutive nature of the rights issue, it was unsurprising there were many queries regarding the thought process behind the rights issue.
It was explained that it was due to a “perfect storm” of bad news. Jerome Powell’s aggressive Fed Interest Rate hikes, potential Tax Regulation issues that result in a 30% dividend withholding tax and a Trade war with China combined to depress unit prices. Private placement was ruled out due to the large amount of financing required for the Westpark Portfolio.
As such, management faced a choice – Issue dilutive rights or miss an opportunity to acquire a portfolio of properties that was in line with growth strategy. They chose to proceed with the dilutive rights.issue. Keppel REIT Management CEO Mr Paul Tham (who is a board member) concurred with this assessment.
This sounds logical but why the huge discount? That remains unexplained. I’ll probably need to fact check this explanation as well.
Aggressive Growth Plans
A portion of the meeting was dedicated to questions regarding growth and acquisitions.
I asked Management if they had a target AUM size. Chairman McMillan mentioned that they don’t have a target in mind, but are currently looking to grow AUM by 20% year on year.
A unitholder also asked on the Sponsor’s pipeline. Not much light was shed on that, probably due to the Sponsor being a private fund. That said, management will be looking to acquire properties from open market as well, not just from the Sponsor. It was also mentioned that there are 1-2 properties they are currently looking to acquire in the next 1-2 months.
Miscellaneous Questions
Some unitholders asked some “getting to know you” kind of questions. Here are some of the more interesting ones.
Why List in Singapore?
Of the world’s largest International REIT listing locations, only US, London and Singapore was considered. Japan, though having a REIT market bigger than Singapore, is closed off from foreign managers. Listing in the US was not ideal due to the extremely small size of the REIT compared to other US REITs. There is also great interest in the US at tapping into Asian capital markets.
As such, to management it was a no brainer to list in Singapore.
Why call yourself KORE?
Mano in typical fashion posed a fun question on why the REIT calls themselves KORE when it is not a direct short form of the REIT name. Apparently, it is a play on the word “Core” with a K to reflect Keppel, in a way to say that the REIT properties are important/essential.
Final Thoughts
With such an aggressive AUM target and little debt headroom to play around with, it is likely that KORE will have to tap the equity markets again for funds soon. Whether this will be in the form of placements or rights time will tell. Given their first rights issue was DPU dilutive, I will probably need to set aside more funds going forward for any rights issues.
On the flip side, the REIT is still yielding quite highly with my cost yield close to 10% and trading yield at about 8%, so they are certainly paying you in the mean time.
This REIT is a truly classic case of assessing an investment’s risks and returns. It is a REIT with potential future downside while having very decent trading yields at the moment. The key question you should ask yourself before investing is this – Does the risks justify the returns?
I thank the Board and fellow unitholders for a enlightening AGM.
Reference Resources
KORE 2019 AGM Slides
KORE Q1 2019 Results
Other AGMs I’ve written about
Capitaland Mall Trust FY2018 AGM
Frasers Property Ltd FY2017 AGM
In case you missed my last article
SG Electricity Market Guide – Q2 2019
Happy Hunting,
KK
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