Latest / Investor Exchange / Pickleball, Tech Hubs & The Great Dividend Comeback – KORE US REIT FY2025

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Pickleball, Tech Hubs & The Great Dividend Comeback – KORE US REIT FY2025 · Investor Exchange

• 0:13
  The orc, the underdog gets knocked down. The situation looks completely hopeless.
• 0:18
  The music swells. And then, against all odds, the hero returns.
• 0:22
  Works in movies, works in sports. Exactly.
• 0:24
  But in the world of investing, and I am talking specifically about U.S.
• 0:28
  Office real estate here, turnaround has been a very, very dangerous word for the last few years.
• 0:35
  It has, yeah. For a long time, if you heard turnaround in this sector,
• 0:38
  it was usually code for, we are trying to catch a falling knife.
• 0:42
  For please don't sell your shares while we figure out how to pay our debt.
• 0:45
  It has been a scary place to be. But today, right now, we are looking at a set
• 0:50
  of financial results that might actually justify that turnaround label.
• 0:53
  We are doing a deep dive into Keppel Pacific Oak U.S. REIT.
• 0:57
  Or, as they are very clearly signaling we should call them now, K-O-R-E.
• 1:02
  K-O-R-E.
• 1:05
  Short, snappy. We are looking at their full year 2025 financial results,
• 1:11
  which just dropped a few days ago.
• 1:12
  And I have to say, the vibe feels different.
• 1:16
  It does feel different. I mean, think about the macro picture.
• 1:18
  The U.S. economy has seen those three interest rate cuts in 2025.
• 1:23
  Inflation is moderating. Suddenly, the ice seems to be thawing. Right.
• 1:28
  So the mission for this deep dive is to look at these numbers and answer the
• 1:32
  billion dollar question, is CARA back? Is it safe to go back into the water?
• 1:36
  It's a nuanced question.
• 1:38
  There is definitely good news here, specifically regarding cash flow and, I'd say, debt survival.
• 1:43
  But there are also operational challenges, real ones, that haven't just magically vanished.
• 1:47
  Well, let's start with the headline. The thing that probably made every unit
• 1:50
  holder sit up straight and spill their coffee. They gave money.
• 1:52
  They did. The early resumption of distributions.
• 1:55
  Yeah. This is a huge deal because, if I recall the timeline correctly,
• 1:59
  they weren't supposed to.
• 2:00
  They were effectively on a payment holiday. They were.
• 2:04
  To understand why this matters so much, we have to rewind to February 2024.
• 2:09
  Okay. That was the dark night of the soul for CORE.
• 2:12
  They announced a recapitalization plan. Essentially, their balance sheet was
• 2:17
  under pressure, leverage was creeping up, and they needed to stop the bleeding.
• 2:21
  So they turned off the tap. Completely.
• 2:23
  They suspended all distributions dividends for a planned two-year period.
• 2:28
  The guidance was incredibly clear.
• 2:30
  We are not paying you until the second half of 2025 results are out.
• 2:34
  Payable in 2026. Which, for a REIT investor, is a bitter pill.
• 2:38
  The whole point of a real estate investment trust is the investment part, the income. Exactly.
• 2:44
  But looking at these results for the second half of 2025, they have declared
• 2:48
  a distribution per unit, or DPU, of 0.25 U.S. cents.
• 2:52
  Okay, I have to play the skeptic for a second. 0.25 cents. That is a tiny amount
• 2:56
  compared to what they used to pay back in the glory days. Is this just a token gesture?
• 3:01
  Is it a crumb? In absolute dollar terms, sure. It is small. But you have to
• 3:05
  look at it from an investor's perspective.
• 3:06
  The significance isn't the size of the check. It's the signal. The signal.
• 3:11
  A massive signal. It signals that the recapitalization plan is officially concluded.
• 3:15
  They beat their own timeline. It's a flare gun going off. They're saying, we survive.
• 3:19
  Precisely. So how did they pull that off? Did they just find a bag of cash under
• 3:24
  a floorboard in one of their buildings?
• 3:26
  Because the office market hasn't exactly been booming? No, it wasn't magic and
• 3:30
  it wasn't luck. It was aggressive, strategic debt management.
• 3:34
  The documents highlight that they secured U.S. $152.5 million in loan facilities.
• 3:40
  Loan facilities sounds like fancy banker talk for taking on more debt to pay old debt.
• 3:46
  In a way, it is refinancing. Yeah. But you have to look at what that money achieved.
• 3:51
  By securing these loans, KRE has addressed every single term loan maturity for 2025 and 2026.
• 3:58
  Wait, let me make sure I understand this. So they have no term loans coming
• 4:00
  due this and next year? Zero.
• 4:02
  They have no term loans due until 2027. Wow.
• 4:05
  They effectively bought themselves a clear runway for the next two years.
• 4:08
  That is massive for stability.
• 4:10
  I imagine that's why they felt comfortable turning the dividend tap back on,
• 4:14
  even if it's just a trinkle. It's like holding your breath underwater.
• 4:17
  They finally broke the surface and took a gasp of air. That is a great analogy.
• 4:21
  The uncertainty of can we pay the bank next month is gone for the immediate
• 4:26
  future. What about the leverage?
• 4:28
  Did taking on this new facility blow up their ratios?
• 4:31
  It's manageable. Their aggregate leverage is at 44.1 percent. OK.
• 4:36
  In the context of Singapore REITs, where the hard limit is 50 percent,
• 4:39
  they have breathing room and their interest coverage ratio is 2.5 times.
• 4:44
  Meaning they earn enough to pay their interest bill two and a half times over.
• 4:48
  Right. It's not the most comfortable position in the world. You'd prefer that number to be higher.
• 4:52
  But it is stable enough to resume distributions. It signals to the market that
• 4:56
  the crisis phase is over.
• 4:57
  Okay, so the balance sheet is stabilized. That's step one. But let's look at the actual business.
• 5:01
  Are they making money renting out offer dues? Right. Because I'm looking at
• 5:05
  the income statement and I see a conflict.
• 5:07
  You're seeing the divergence between the top line and the bottom line. Exactly.
• 5:11
  If you look at the net property income, or NPI, it is actually up.
• 5:15
  It rose 3.0% year-on-year to U.S. $80.7 million.
• 5:21
  That sounds great. That says the buildings are performing.
• 5:24
  But then I look at the distributable income, the actual cash available to give
• 5:28
  to investors, and it dropped nearly 10 percent to U.S. $43.0 million.
• 5:34
  It's this classic case of good property, expensive debt.
• 5:37
  Break that down for us. How does income go up, but the cash left over go down?
• 5:42
  So the properties themselves did perform well.
• 5:44
  The NPI increase was driven by higher recoveries income, which is basically
• 5:48
  billing tenants for operating expenses. Okay.
• 5:51
  And they also managed to successfully appeal and lower their property taxes.
• 5:54
  That's just good management. So the buildings are profitable.
• 5:57
  Yes. But then you have to pay the mortgage. Finance expenses rose by 5.4% to
• 6:02
  roughly U.S. $29.1 million.
• 6:04
  But wait, didn't the Fed cut rates three times in 2025? Shouldn't their costs
• 6:08
  be going down? You would think so, but corporate debt has a lag.
• 6:12
  The documents note that some interest rate swaps expired in 2025.
• 6:16
  Ah, right. Swaps. Those are the
• 6:18
  financial instruments that lock in a fixed interest rate, right? Exactly.
• 6:22
  Think of it as an insurance policy you bought three or four years ago when rates were basically zero.
• 6:28
  KORE had some of those old cheap swaps. When they expired in 2025,
• 6:32
  that protection vanished. And they were exposed to the current rates.
• 6:36
  Correct. And even with the recent cuts, the new normal for interest rates is
• 6:40
  significantly higher than it was in 2021.
• 6:43
  Sure. So they are paying current market rates on that debt now.
• 6:47
  Plus, they had higher professional fees related to all this restructuring work
• 6:51
  lawyers and bankers aren't cheap. That makes sense.
• 6:54
  It's like getting a raise at
• 6:55
  work, but your mortgage payment went up by double the amount of the raise.
• 6:58
  You're technically earning more salary, but you feel poorer at the end of the
• 7:01
  month. That is the perfect way to visualize it.
• 7:04
  The silver lining is that they mentioned 64.4% of their loans are still hedged.
• 7:08
  So they aren't fully exposed to floating rates, but the cost of borrowing money
• 7:12
  simply ate up the gains from the property income. Let's pivot to the tenants.
• 7:16
  Because you can fix the debt, you can hedge the loans, but if nobody's in the
• 7:20
  building, you're eventually going to have a massive problem.
• 7:23
  I saw the occupancy number and, well, it's not 90% anymore. No, it isn't.
• 7:28
  Committed occupancy ended 2025 at 87.2%. That's a drop.
• 7:33
  It was hovering around 90% last year.
• 7:36
  In a turnaround story, shouldn't that number be going up? Is this the red flag
• 7:40
  we should be worried about? It is certainly the metric to watch closely.
• 7:43
  87% is softer than you'd like. But, and this is a very big but,
• 7:48
  you cannot look at occupancy in a vacuum.
• 7:51
  You have to pair it with another number, rental reversion. That's the difference
• 7:54
  between what the old tenant paid and what the new tenant pays for the same space. Correct.
• 7:58
  And for the full year 2025, KRE's rental reversion was positive 6.8%.
• 8:03
  Okay, that is interesting.
• 8:04
  So even though they have slightly fewer tenants, the ones who are signing leases
• 8:07
  are agreeing to pay nearly 7% more than the previous rates.
• 8:10
  Yes. And that is a crucial counterargument to the office is dead narrative.
• 8:15
  If the office were truly dead, landlords would be slashing prices just to get bodies and seats.
• 8:21
  You'd see negative reversion 20% discounts.
• 8:24
  Corriar is proving they still have pricing power. However, I have to play devil's
• 8:28
  advocate here. I was digging through the quarterly breakdown in the report.
• 8:31
  In Q4 2025, specifically, just the last three months of the year,
• 8:37
  that rental reversion number dipped into the negative.
• 8:40
  It was minus 0.6%. It was.
• 8:44
  Did they lose their pricing power at the end of the year? That caught my eye, too.
• 8:47
  It looks bad on a spreadsheet. The management provided a very specific explanation
• 8:52
  for it, and it actually highlights their strategy.
• 8:54
  It happened at a property called 125. Okay.
• 8:57
  They signed a new lease that immediately replaced an expiring one.
• 9:00
  Usually in this market, when you get a new tenant, you have to offer incentives.
• 9:03
  You have to give them six months of free rent, or you have to write a check
• 9:06
  for tenant improvements renovations to entice them. You have to buy the business.
• 9:11
  Exactly. That costs a lot of upfront cash.
• 9:13
  In this specific case at $125, they didn't have to do that.
• 9:17
  They accepted a slightly lower phase rent, the headline number,
• 9:21
  but because they saved on all those incentives, the net cash flow.
• 9:25
  The net effective rent was actually better.
• 9:28
  I see. So the headline rent number looked lower, but the actual profitability
• 9:32
  of the lease was higher because they didn't have to give away the farm to get the deal. Exactly.
• 9:37
  It's a strategic trade-off. And it highlights why you can't just look at one
• 9:41
  number in isolation. You have to look at the deal structure.
• 9:44
  Speaking of tenants, who are these people paying 7% more for rent?
• 9:48
  I feel like every time I read about office real estate, it's about tech companies
• 9:51
  downsizing. Is Karol just leasing to tech bros?
• 9:54
  Karee is definitely heavily exposed to tech. They classify it as K-Mai technology,
• 9:59
  advertising, media, and information. Right.
• 10:01
  Along with medical and healthcare, these defensive sectors make up 51.1% of
• 10:06
  their portfolio by net-leadable area.
• 10:08
  Medical makes sense. You can't do surgery from your living room via Zoom.
• 10:12
  But is TMI still safe? It has been volatile, but look at their concentration risk. This is key.
• 10:18
  Their top 10 tenants only account for 29.5% of the cash rental income. That seems low.
• 10:25
  It is very low. That is a good thing. Some REITs have a single bank or a single
• 10:30
  tech giant paying 15% of their total income.
• 10:33
  If that one tenant leaves, the ship capsizes. Got it.
• 10:36
  Core is diversified. If one mid-sized tech firm in Seattle goes fully remote,
• 10:41
  it stings, but it doesn't break the bank.
• 10:43
  That's good to know. Now let's pivot to the why. Why are tenants staying?
• 10:47
  Why are they paying higher rents? The presentation slides were vibrant.
• 10:51
  I saw photos of cocky bars, lounges, and I kid you not, a pickleball court.
• 10:56
  Yes, the pickleball court at the plaza buildings is becoming iconic.
• 10:59
  Is this what it takes to rent an office in 2026? We really need pickleball.
• 11:02
  It sounds trivial, doesn't it? Yeah. But it's actually central to their survival
• 11:06
  strategy. They call it the flight to quality. I call it the amenity war.
• 11:10
  The amenity war. The logic is simple. In a hybrid work world,
• 11:14
  employees don't have to come in. So companies need offices that act as a magnet.
• 11:18
  They need to earn the commute. So the office has to compete with the comfort of my home. Basically.
• 11:23
  The documents list extensive upgrades. 62% of their properties now have outdoor spaces.
• 11:29
  85% have tenant lounges and conference centers.
• 11:33
  They're putting in new coffee bars at West Park and Westmore Center.
• 11:36
  They aren't just renting four walls and a desk anymore. They are renting a lifestyle.
• 11:41
  It sounds like the hotelification of the office. That is exactly what it is.
• 11:44
  And that ties into their location strategy, too, doesn't it?
• 11:47
  Right. If you notice, they aren't in Manhattan or downtown San Francisco.
• 11:50
  No, they talk about growth markets and 18-hour cities.
• 11:53
  Right. Places like Austin, Denver, Nashville, Orlando, and the suburbs of Seattle
• 11:59
  like Bellevue. The Sunbelt and the tech hubs.
• 12:02
  The data in their report is fascinating.
• 12:04
  It says that 66% of their net proper income comes specifically from these tech
• 12:09
  hubs, Bellevue, Austin, Denver.
• 12:11
  The argument is that these are places where people actually want to live.
• 12:14
  They have lower taxes, better weather, and crucially shorter commutes.
• 12:18
  Commute time is a big one. It's the biggest friction point.
• 12:22
  Commuting into downtown Chicago or New York can be an hour and a half of misery.
• 12:27
  Driving to an office park in Bellevue or Austin might be 20 minutes.
• 12:31
  And the hypothesis is that if people like living there and the commute isn't
• 12:35
  a nightmare, they are more likely to actually go to the office. The data supports it.
• 12:39
  The report cites JLL research showing that office attendance and leasing activity
• 12:44
  are recovering much faster in these lifestyle markets than in the traditional gateway cities.
• 12:49
  Gore believes these markets are in the rising phase of the rental clock.
• 12:53
  While places like San Francisco are still bottoming out. Okay,
• 12:56
  so we have the financials, the operations, and the strategy.
• 12:59
  Now let's talk about the value of the thing. If I bought core units,
• 13:02
  I own a share of these buildings. What happened to the value of the portfolio?
• 13:06
  It remains surprisingly stable. The total portfolio valuation is U.S. $1.3 billion.
• 13:12
  Stable is good. I feel like we've seen some REITs report 10,
• 13:15
  20% drops in valuation recently.
• 13:17
  We have. Now technically, and this is for the accounting nerds listening,
• 13:21
  CORE reported a net fair value loss of U.S. $40.5 million for the year.
• 13:26
  Wait, you just said it was stable. How do you lose $40 million and call it stable?
• 13:30
  This is where accounting gets fun. The external appraisers looked at the buildings
• 13:34
  and said, the market value is about the same as last year.
• 13:38
  However, CORE spent about $39.5 million on capital expenditures building those
• 13:43
  spec suites, the pickleball court, the lobbies. Okay.
• 13:46
  In accounting terms, if you spend $40 million on improvements,
• 13:49
  but the total appraised value doesn't go up by $40 million, you have to book a loss on that spending.
• 13:55
  I see. So the market value of the bricks and mortar held firm,
• 13:58
  but the accounting had to write off the cash they spent improving them? Exactly.
• 14:03
  In this environment, where capitalization rates have been expanding and values
• 14:06
  have been cratering elsewhere, holding your valuation flat even after CAPEX is effectively a win.
• 14:11
  It suggests they have found a floor. And speaking of new chapters and fresh
• 14:15
  starts, we alluded to this at the start, the name change.
• 14:18
  Yes. Keppel Pacific Oak U.S. REIT
• 14:20
  is quite a mouthful. They are officially rebranding to Core U.S. REIT.
• 14:25
  K-O-R-E U.S. REIT. The ticker remains K-O-R-R-D-S-P.
• 14:30
  But the name change signals a break from the past.
• 14:33
  They've exited the recapitalization plan, they've fixed the debt,
• 14:36
  and now they have a new name.
• 14:38
  It's a refreshed chapter, as they put it. So what does this new chapter look like for 2026?
• 14:43
  We know the debt is clear until 2027. We know the distributions are back, albeit small.
• 14:48
  What is the outlook? The macro environment is shifting in their favor.
• 14:52
  But there was one statistic in the outlook section that I think is the most
• 14:55
  important number in the whole report. It's about supply. What about it?
• 14:58
  Construction of new U.S. office space is down more than 20% below historic lows.
• 15:03
  Meaning no new buildings are coming online.
• 15:05
  Very few. And basic economics tells us that if demand picks up even a little
• 15:09
  bit due to the economy improving or return to office mandates and supply is
• 15:14
  flat or shrinking, that is very good for existing landlords. It creates scarcity.
• 15:19
  Exactly. If you have a high quality building in Bellevue with a pickleball court,
• 15:23
  you don't have to worry about a shiny new tower opening across the street and
• 15:26
  stealing your tenants. What about the payout policy?
• 15:29
  Should investors expect the dividend to jump back to 2019 levels soon?
• 15:33
  No, the manager plans to start with a conservative payout ratio.
• 15:36
  They are managing expectations here.
• 15:38
  Do not expect massive dividends immediately. They want to ensure it is sustainable.
• 15:43
  They want to retain cash to keep the balance sheet safe. And probably to keep
• 15:48
  investing in those amenities.
• 15:49
  If the amenity war is real...
• 15:52
  They can't stop spending on upgrades. It sounds like they are cautiously optimistic.
• 15:56
  The Fed has paused rates after the cuts, inflation is down, and they have breathing room.
• 16:01
  Cautiously optimistic is the right phrase. They have survived the storm.
• 16:05
  The ship isn't sinking. In fact, it's moving forward again.
• 16:07
  But they still have to navigate the occupancy challenge. Getting from 87% back
• 16:12
  to 90% or 92% is the next big hurdle. So here's where it gets really interesting for me.
• 16:17
  We've established they have a runway until 2027. That's two years. Yeah.
• 16:23
  In those two years, they have to prove that the Lifestyle Office isn't just
• 16:26
  a marketing buzzword. That's the test.
• 16:28
  They are betting heavily that pickleball courts, outdoor lounges,
• 16:32
  and the Sunbelt vibe will convince tech and medical companies to sign leases and pay top dollar.
• 16:39
  And pay higher rents for the privilege. Right.
• 16:42
  So, my provocative thought for the listener is this. We used to think of the
• 16:46
  office as a utility, a place with a desk and a phone.
• 16:50
  Care Irie is essentially turning the office into a product, almost a hospitality product.
• 16:55
  It's the hotelification of the asset class. A country club you work in.
• 16:59
  The question is, is that enough?
• 17:01
  Can you make the office so nice that people want to commute?
• 17:05
  And more importantly for the investor, can they push that occupancy back above
• 17:09
  90% before that 2027 debt wall hits?
• 17:12
  Because if they get to 2027 and occupancy is still slipping,
• 17:16
  that runway they bought gets very short. very fast. That is the risk.
• 17:20
  The debt is fixed, but the business model is still proving itself.
• 17:24
  Well, it's certainly going to be a fascinating two years to watch.
• 17:26
  We'll be here to track it.
• 17:27
  That wraps up our deep dive into Korea U.S. REIT.
• 17:30
  Just a reminder before we go, this content is intended to serve strictly and
• 17:34
  only as an informational, independent, objective summary of recent events and
• 17:38
  should in no way be interpreted, construed, or relied upon by any party as inside
• 17:42
  information or financial advice. Thanks for listening.