Top Stock Market Highlights of the Week: Keppel Pacific Oak US REIT, Far East Hospitality Trust and Grab-Goto

Welcome to this week’s edition of top stock market highlights.

Keppel Pacific Oak US REIT (SGX: CMOU)

Keppel Pacific Oak US REIT, or KORE, delivered a shock this week by announcing a recapitalisation plan and suspending its distributions for 2024 and 2025.

The US office REIT announced this decision along with the release of its 2023 financial results.

For 2023, gross revenue inched up 1.9% year on year to US$150.8 million while net property income (NPI) increased by 2.2% year on year to US$86.1 million.

With distributions suspended for the second half of 2023 (2H 2023), the distribution per unit (DPU) for 2023 plunged by 57% year on year to US$0.025.

KORE’s portfolio valuation also fell by 6.8% year on year to US$1.3 billion, pushing its aggregate leverage to 43.2%, up from 39.1% in the previous quarter.

The manager remarked that lenders remained concerned about the US office market and were reluctant to lend above 45% for that market.

Continued investments are needed to maintain the portfolio’s performance, occupancy, and valuation.

KORE’s manager feels that debt financing is not sustainable given its 43.2% leverage level and the higher cost of debt.

The REIT had evaluated several recapitalisation options such as divestments and equity fundraising (EFR).

However, divestments now would be conducted at an unfavourable price while an EFR will not raise enough capital to solve KORE’s leverage concerns on a long-term basis.

Hence, the manager decided to suspend distributions to avoid selling buildings at significant discounts, build up more funds through DPU retention, and allow the REIT to refinance its loans successfully in 2024 and 2025.

KORE will continue to invest in the portfolio to maximise NPI with a plan to restart distributions in 2026.

Should market conditions allow, the US commercial REIT will re-commence distributions at an earlier date.

Far East Hospitality Trust (SGX: Q5T)

Far East Hospitality Trust, or FEHT, also released its 2023 earnings that saw an improvement in all metrics as air travel and tourism resumed with a bang.

The hospitality trust saw its revenue for 2023 jump 27.8% year on year to S$106.8 million while its NPI rose 27.7% year on year to S$98.7 million.

Distribution to stapled security holders (DPS) climbed 25.1% year on year to S$0.0409.

FEHT also enjoyed a fair value gain on its investment properties in 2023, with the value rising by 2.6% year-on-year from S$2.4 billion to S$2.5 billion.

The hospitality trust is one of the lowest-geared REITs with an aggregate leverage of 31.3% as of 31 December 2023.

The REIT’s average cost of debt stood at 3.3% with 42.6% of its loans pegged to fixed rates.

An additional incentive fee of S$18 million was received by the REIT manager from the divestment of Central Square which will be used to cushion the impact of higher interest rates.

FEHT also reported improved operating metrics across its hotel and serviced residences portfolio.

Average occupancy increased from 73.7% to 80.1% in 2023 for hotels while revenue per available room (RevPAR) jumped 47.8% year on year to S$136.

Serviced Residences saw its occupancy inch up 0.3 percentage points to 87.8% while RevPAR improved by 17% year on year to S$229.

Grab Holdings (NASDAQ: GRAB)

Grab and GoTo Group (IDX: GOTO) are once again exploring a potential merger.

The two biggest ride-hailing companies in Asia are looking at a possible combination to stem the losses arising from tough competition between the two.

Several scenarios are being discussed with a possible one being the acquisition of GoTo by Grab using a combination of cash and stock.

These talks, however, may not lead to a merger as other options include splitting up their main markets.

Valuation is a key point to consider for any deal with other concerns being the deal structure and governance.

Also, a mega-merger will surely face intense scrutiny by regulators as these two players are the clear number one and two players in their respective markets.

Antitrust laws may prohibit such a merger if it reduces competition substantially and creates a situation where the merged player can implement monopolistic pricing.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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