KORE US REIT (CMOU.SI) Earnings Call Transcript & Summary

Good morning and welcome to Keppel Pacific Oak US REIT's FY 2023 Financial Results Webcast. My name is Brenda and I represent KORE on the Investor Relations front. Before we begin, let me introduce the management team on the session. We have CEO, Mr. David Snyder; and CFO, Mr. Andy Gwee. We will start the webcast with an overview and explanation of the recapitalization plan and then provide an overview of KORE's financial and operational performance. Before we begin, we would like to run through some housekeeping. For analysts who are joining us on the Webex platform, please be reminded to mute your mic throughout the presentation. If you would like to ask a question, please click on the raise hand button and wait for our cue before you pose your question. For those joining us online via the webcast platform, please type your questions via the chat box provided. Without further ado, I will now hand the time over to the CEO, Mr. David Snyder.

Good morning, everyone, and thank you for joining us. We know most of you are going to want to hear about our recapitalization plan more than anything else so let's go ahead and start with that on Slide 4. As we previously announced, KORE's leverage rose to 43.2% post the 2023 valuation. While this is below the MAS initial limit of 45% and the MAS maximum limit and our debt covenant limit of 50%, we believe we need to be proactive and take the appropriate actions now. This is especially necessary since lenders remain concerned about the U.S. office market. Banks are reluctant to lend above 45% leverage for the U.S. market regardless of the 50% limits. Therefore, the Manager is acting now to hopefully prevent the risk of nearing or exceeding regulatory or covenant thresholds. Because of the overall U.S. office market troubles and the default of one of our peers here in Singapore, the fact that KORE's operating performance has remained stable despite the difficult U.S. market that began in 2020 and its occupancy at the end of 2023 was 90.3% while its NPI grew in 2023 does not make a difference for KORE's ability to borrow. KORE's occupancy and operating performance have largely been a result of good asset management and the investment in the right things at the property level. Hence, continued investments into the portfolio are necessary to maintain performance, occupancy and valuation. However, it is not sustainable for KORE to continue funding capital via debt given its leverage level, the limits noted above and the lending stance of banks. As you can see on Slide 5, several options were evaluated to recapitalize KORE's balance sheet including divestments, equity fundraising and a reduction of distributions; all had issues and some were simply unworkable. KORE is unable to divest any properties at this point at a price that would be beneficial to KORE and its unitholders because of the difficult U.S. real estate market. Based on discussions we've had with various banks and EFRs unlikely to raise enough equity capital in the present market environment to solve leverage concerns on a long-term basis and would likely require KORE to seek additional capital from unitholders again in the near future. In relation to the suspension of distributions, the drop in valuation of KORE's assets announced on 30 January 2024 creates a loss situation in which any distributions would be in excess of the combination of profits and the USD 75 million of loans due for refinancing by the fourth quarter of 2024. However, suspending distributions would adversely affect unitholders that rely on those distributions. While recognizing that, the Manager still determined the best option for KORE and its unitholders is to suspend distributions beginning second half 2023. KORE expects distributions will be suspended through the second half of 2025 distribution that would otherwise be paid in the first half of 2026. This option is expected to provide significantly more capital over 2 years compared to what an EFR can raise today. It is also essentially necessitated by KORE's 2023 loss and upcoming maturities and it is the only solution with a good chance of success. Let's move to the next slide. As most of you know, U.S. office requires a substantial amount of capital to build out and lease office space because the landlords rather than the tenants are responsible for funding the tenant improvements in addition to funding new or improved tenant amenities, leasing commissions and other costs. This is very different from the Singapore office market and therefore, office REITs that invest in the U.S. require more capital investment than office REITs that invest in Singapore. Without the necessary capital investments, occupancies and NPI will both decline resulting in valuations declining even more significantly. The Manager therefore plans to continue to reinvest in the properties to ensure they remain attractive to current and prospective tenants and the Manager is of the view that this is in the best interest of KORE and its unitholders. As most of you are also aware, leverage has grown each year since capital expenditures have been funded with debt. In the years KORE had acquisitions, the increase in leverage was somewhat offset by raising additional capital. In 2022, KORE divested its 2 Atlanta buildings and some of the proceeds were used to repay outstanding loan obligations, which was why leverage only grew to 38.2% from 37.2% in that year. In 2023, KORE's leverage increased to 43.2% primarily due to the lower portfolio valuation as well as, but to a lesser extent, its debt funded capital spend. Given the capital KORE expects to invest over the next 2 years, the leverage ratio and interest coverage ratio will reach undesirable levels if capital needs continue to be funded with debt if such debt was even available, which would eventually result in KORE being unable to comply with the regulatory leverage limits or its debt covenants. Let's move to Slide 7. By suspending distributions and spending capital wisely, KORE's goal is to maintain leverage within the MAS limits and bank debt covenants though there is always the risk that asset valuations could change enough to cause KORE to exceed MAS limits or breach the bank debt covenants. KORE is planning to invest capital strategically at each property in order to mitigate the risks of this possibility as best it can. The recapitalization plan does not anticipate KORE selling any buildings at significant discounts to their current valuation nor does it anticipate KORE selling any assets during 2024 or 2025 given current market and lending conditions. KORE will also attempt to refinance the loans that are due in 2024 and 2025 prior to maturity. KORE will continue to invest in the portfolio with the goal of maximizing NPI throughout the recapitalization period and restarting distributions for FY 2026 at the highest appropriate level balancing the capital needs of the REIT and the desire to distribute income to unitholders. On Slide 8, we highlight several key U.S. office S-REIT differentiators. There are various factors that impact the operational performance and differentiate the U.S. office REITs. Of particular importance, these include the markets in which the REITs invest, their tenant concentration, tenant mix and their asset management strategies. Asset management strategy, regardless of the other factors, is critical and the following are of particular importance: providing the right amenities that attract tenants, building out high quality tenant spaces and creating speculative suites to accelerate leasing and cash flow. All of the above require significant investments of capital, but should result in stronger occupancy, NPI and valuations. We believe KORE has shown over the years that it is the best U.S. office REIT in all of the areas mentioned because of its occupancy and NPI performance. We want to highlight the results of KORE's asset management strategy as shown by its investments into the portfolio and its related occupancy trends and compare those resulting occupancy trends to the U.S. office market and our peers so our unitholders can see why they should continue to trust us to make good decisions for the REIT and for its unitholders. On Slide 9, you can see the percentage of capital expenditure for KORE versus Prime and MUST in 2020, 2021 and 2022 based on each of our respective financial statements. Given the different portfolio beginning values, the percentage spent provides a better picture of capital investment than raw dollars. KORE invested roughly double the average percentage of its peers over the same time periods. The results influenced by the other factors from Slide 8 as well are clear. KORE's occupancy bounced up and down slightly, but fell by only 2.2% from the end of 2019 to the third quarter 2023. Prime's occupancy consistently fell with a total drop of 10.8%. MUST's occupancy consistently fell with a total decline of 11.1%. KORE's occupancy results while maintaining a stable NPI do not just outperform our peers. They also beat the U.S. market average as well as the U.S. Class A average represented by CoStar's 4- and 5-star building occupancy, which fell 3.5% and 6.4%, respectively, over the same time frame. KORE has managed and invested in its portfolio wisely and strategically since inception and our occupancy and operating performance have demonstrated that. We plan to continue to manage and invest in the portfolio wisely and strategically to try to continue to maximize occupancy and NPI for our unitholders. I would like to be clear that this was not an easy decision to make and the Manager understands that many unitholders rely on the income from KORE's distributions. Additionally, the Manager recognizes the reduced cash flow will adversely impact unitholders. However, the Manager believes that the impact of not investing in the portfolio would have a significantly worse long-term effect on KORE and its unitholders. Occupancy would fall, NPI would decline and valuations would be significantly impacted. Debt limits would be hit, debt covenants would be breached and we have all seen how that plays out and know we want to avoid that possibility and that this recapitalization plan is the best option available. Given all of the above, the Manager will work tirelessly to try to achieve its goal of optimizing NPI with a view to restarting distributions as early as possible. Moving to Slide 11. Last, but very importantly, we hope unitholders will understand that while distributions to unitholders are slated to be suspended until the end of 2025, KORE would have to bear the withholding tax based on the proportion of unitholdings of unitholders who fail to submit their U.S. withholding forms and certificates. This would reduce the income retained and negatively impact KORE and its unitholders. Therefore, the Manager would like to strongly urge all unitholders to continue to submit the relevant tax forms to reduce KORE's withholding tax burden. Okay. With that, we will now move on to our normal quarterly presentation beginning on Slide 13. KORE's portfolio valuation decreased by only 6.8% or $97.1 million year-on-year. Taking into consideration the capital expenditures and tenant improvements for the year, there was a fair value loss of $142.3 million or 9.7%. We expect this will ease investor concerns about our valuations and should demonstrate that we truly are trading at an enormous discount to our NAV. However, it did bring our aggregate leverage ratio to 43.2% and our interest coverage is now 3.2x. During the year, we leased approximately 704,000 square feet of space equivalent to 14.7% of NLA. Portfolio occupancy was 90.3% at the end of December 2023, very strong for U.S. office. Despite the disposal of the 2 Atlanta assets in the second half of 2022, NPI was 2.2% higher year-on-year due to better performance from the remaining portfolio. I will now hand it over to Andy to elaborate on KORE's financial performance.

Thanks, Dave, and good morning, everyone. On Slide 15 is a summary of KORE's financial performance for the second half and full year of 2023. Gross revenue and NPI was higher year-on-year and that's due to the better performance from the remaining portfolio. Since 2Q 2022, we have commenced paying our management fees 100% in cash instead of KORE's unit and as such, we provided an adjusted income available for distribution to provide or to allow for like-for-like comparisons. So as you can see for FY 2023, actual income available for distribution of USD 52.2 million was 13.8% lower than that of the previous year and that's due mainly to the higher financing costs, the divestment of the Atlanta assets in 2 half of 2022 and partially offset by better performance from the existing portfolio. Next, Slide 16 is a snapshot of our balance sheet as at 31st December '23. And as at the end of the year, total assets was USD 1.4 billion and NAV was USD 0.69 per share. Then moving on to Slide 17 on capital management. Aggregate leverage was 43.2% and interest coverage was 3.2x as at the end of December. It should be noted that KORE's debt covenants are consistent with MAS regulatory limits, which have a maximum leverage of 50% and a minimum ICR of 1.5x. All-in cost of debt was 4.12% per annum. Excluding the amortization of the upfront debt financing cost, average cost of debt was 4%. Average term to majority was 2.7 years. About 73.8% of the noncurrent loans have been hedged and every 50 bps increase in SOFR translated to impact of about USD 0.076 in DPU per annum. I will now pass back to Dave to provide an update on KORE's operational performance.

Thanks, Andy. Slide 19 shows the key growth markets where KORE operates as well as our properties' occupancies. Overall portfolio committed occupancy was healthy at 90.3% as previously mentioned due mainly to leases signed at the Seattle properties and Maitland Promenade though we lost tenants at Iron Point and Westmoor as expected. We feel very good about the 90% occupancy in this environment and market. On to Slide 20. Fourth quarter saw us lease 165,000 square feet of space or 3.4% of the portfolio. This brought total leasing for 2023 to 14.7% of our portfolio NLA. Most of the leasing activity occurred in the Seattle - Bellevue/Redmond and the Orlando markets. Our built-in average annual rental escalation is 2.6%, which continues to provide growth for KORE. Rental reversion for 2023 was negative 1.8% as was skewed by the major renewal and expansion lease mentioned in prior quarters at Maitland. Excluding Spectrum's lease, year-to-date rental reversion was positive 0.9%. The rental reversion for the fourth quarter was negative 4.4% due to 1 large tenant renewal at Plaza Buildings. The bulk of new leases signed in 2023 were mainly from TAMI tenants. Slide 21 highlights KORE's geographic and industry diversification. At approximately 67% of NPI, our tech hubs of Bellevue/Redmond, Austin and Denver continued to drive our performance. And with slightly over 51% of our tenants by NLA coming from the sectors of TAMI and medical and health care, our industry-focused diversification continues to set us apart from our peers. Turning to Slide 22, we highlight our low tenant concentration risk. One of KORE's unique value propositions is our low tenant concentration driven by the fact that we have over 380 distinct tenants. Consistent with our portfolio focus, the majority of our Top 10 tenants are from established TAMI firms located in the markets of Nashville, Denver and Bellevue/Redmond. Our top tenant, Comdata, contributes only 3.7% of portfolio of CRI, which is significantly less than our peers' top tenants. This is also true for the total from our Top 10 tenants, which contributed just 26.3% of cash rental income, a lower percentage than our peers. As an addition to this slide, we added in the percentage of NLA for each tenant. On Slide 23, we summarize our property valuations. Across the portfolio, the assets generally saw declines in their valuations as valuers factored in increases in interest rates during 2023, which impacted capitalization and discount rates across the portfolio as well as more conservative assumptions for operations, particularly at the Plaza Buildings, Westmoor Center, Bellevue Tech Center and Iron Point. Overall, the portfolio valuation decreased 6.8% to USD 1.33 billion compared to 2022. Taking into consideration the capital expenditures and tenant improvements incurred during the year, we experienced a fair value loss of $142.3 million or 9.7%. On Slide 24, you'll find a comparison of the last 12 months rent growth at the national level as well as in our key growth markets and in gateway cities. Our key growth markets continue to outperform the gateway cities though the U.S. average pulled slightly ahead largely due to Seattle - Bellevue/Redmond. Similarly, on Slide 25, you will see a chart that shows growth projections for the next 12 months. As we have noted many times over the years, these are CoStar's estimates and while we do not necessarily agree with the specific details, directionally and as it pertains to the different markets within the U.S., it is probably helpful. The projected rent outlook for KORE's key growth markets is substantially better than that for the gateway cities though the projections are behind the U.S. as a whole mostly again due to projections for the east side of Seattle. Slide 26 shows a comparison of the forecasted 12-month rental growth for our markets in light blue against the actual average growth of KORE's key growth markets in dark blue. KORE's portfolio rent growth has remained relatively flat even as projections from CoStar have fluctuated as seen on the light blue line chart and our markets continue to outperform the average of the gateway cities. Turning over to the submarket outlook on Slide 27. Office fundamentals remain relatively sound in KORE's key growth markets. The amounts under construction in Bellevue/Redmond continue to primarily represent Amazon and Microsoft related development while the amount in Las Colinas represents the build-to-suits for Wells Fargo and health care company, Crisil Healthcare. On Slide 29, we highlight some U.S. economic fundamentals. The labor market remains buoyant with historically low unemployment rates helping to support activity. The strongest recovery among the major economies has been in the U.S. The annual inflation rate was 3.2% in December, slightly up from a 5-month low of 3.1% in November though the 6-month trend is actually lower. Investors are expecting to see the first set of rate cuts in March 2024 though there may be some delay in that depending on what the Fed chooses to do. Analysts and brokers are estimating from very small up to 275 basis point cuts in interest rates during 2024. Slide 30 highlights investment company headquarters that are increasingly moving out of New York City and California and into locations where KORE has a presence. As a result of these large headquarters migrating, there is a loss of thousands of high paying jobs taking away tax revenue. Both California and New York City are seeing large budget deficits that are expected to continue through 2024 and beyond. The moves out of high cost of living locations largely went to Sunbelt states. For example, AllianceBernstein relocated jobs to Nashville to save USD 80 million a year. Similarly, Charles Schwab moved to Dallas in an attempt to save the company up to 15% in costs. This slide and the 3 up next are all new data points we have added this quarter to continue to help investors better understand the value of the key growth markets in which we invest and to highlight some improvement in back-to-office trends in the U.S. Moving to Slide 31. Most successful headquarters relocations result from comprehensive workplace and location strategies that leverage qualitative and quantitative research. Austin has emerged as a global tech hub offering cost and culture advantages. Dallas, Houston, Nashville and Denver also lured many new headquarters, often technology companies. This was due to welcoming business environments and easy accessibility to talent due to lower cost of living than many major coastal business hubs and lower or no state income taxes for individuals and corporations among other factors. Our markets and portfolio continue to benefit from these location changes. Our peers, on the other hand, have significant presence in markets such as San Francisco, San Diego and Los Angeles; all 3 markets that have lost headquarters. On Slide 32, we highlight the Top 10 U.S. destination cities in 2023 as measured by U-Haul. This marks the seventh year in a row the sunshine state Florida has had the most cities on the list. Most of these states are located in the Sunbelt and share similarities that include affordability, lower taxes, lower crime rates, better public schools, they are all right to work states and have better weather than states in the Northeast. Separately, Nashville has also been identified as one of the most targeted destinations for relocators. While Nashville is known for music and entertainment, other top employers that are based in or have migrated to Nashville include firms from the health care, manufacturing and technology industries. In just 2022, Nashville grew by roughly 98 residents each day mainly hailing from California. Slide 33 touches on the return to office trend. After prolonged pandemic-related uncertainty, companies are increasingly adopting more defined policies around office attendance requirements. CBRE has been tracking these policies across the U.S. 80% of survey respondents indicated that office is an important part of ensuring corporate success and require more than 50% of teams and functions to be in the office. In 2023, more U.S. companies are providing greater definition around their expectations for office attendance expecting at least 3 days a week on average. Finally, on Slide 34, we close off with a summary of KORE's unique value propositions, including low tenant concentration, our tenant mix and locations that set us apart from the other U.S. office S-REITs. We remain focused on optimizing KORE's portfolio performance, leveraging our well-located assets in key growth markets across the U.S. and exposure to the growth sectors of technology and health care. Thank you. And with that, we're happy to take your questions.

Thanks, Dave. I see we have some analysts who have raised their hands on the Webex platform. Jon Koh from UOB.

And difficult period, but I hope things can improve going forward. I have 3 questions I will read out together. So firstly, you mentioned capital expenditure over the next 2 years will lead to higher leverage. Could you give us the absolute amount of capital expenditure for 2024 and 2025 to gauge the impact? Secondly, there's been some movement in occupancy at Westmoor and also Iron Point. Could you kind of give more detail which are the tenants that didn't renew and progress of refilling the vacant space? Last, but not least, could you give us your expected cost of debt for 2024?

Jon, thanks for the questions. So for CapEx for 2024 and 2025, we're expecting to spend approximately $60 million for 2024 and we're estimating approximately $50 million for the 2025 time frame. For occupancy at Westmoor and Iron Point. At Westmoor, we had 2 tenants that we knew were going to be vacating, Signal Perfection and TraceGains, both of those vacated about 16,000 square feet a piece and we did pick up an additional tenant that offset that by about 6,000. So we had a net around 26,000 square foot drop off there. And at Iron Point, that was primarily PRO Unlimited, which is a big expiration that we've been talking about for well over a year with folks to let them know that that would be coming. There was another small 3,000 square footer. But primarily, the 35,000 change there was PRO Unlimited. I'm going to go ahead and turn your third question over to Andy.

I think your third question is in terms of what is the expected interest rate for 2024. We have built-in -- I mean in terms of the interest rate forecast, it's based on certain expectation of changes in the floating rate. So for example, we are assuming only about 50 bps to 75 bps drop in floating rates throughout 2024. I would say probably, hopefully, a bit on a more conservative side. And then we are also assuming some early refinancing of the loans that will be due in 2024 and 2025 as well. That's all baked into our budget assumptions before we came to this particular recap plan decision. So the all-in interest rate for 2024 is likely to be probably around 4.3%, 4.4%, thereabout.

With regards to occupancy, any prospective tenants you are talking to at Westmoor and also Iron Point? Last year, you were able -- I mean you guys did a very good job of engaging the tenants very early before expiry and last year you assured investors and you have achieved to maintain occupancy above 90%. For this year, would you also be able to like assure investor that occupancy can maintain above 90%?

Well, Jon, I think first I would say we didn't assure people we'd hit 90%. We said it was going to be a very, very tough goal, but it was our goal and our hope. By the end of third quarter, I think we got to the point where we were starting to feel pretty confident about that goal. But we feel like 90% was a bit of a huge undertaking for this time frame in the U.S. For 2024, I would say we do not expect to maintain a full 90%. I think we would expect to see a drop. We're hoping to see maintaining occupancy at a level probably around 88%. That is really our target for this year. It is a tough year with a lot of expirations at Plaza, which we've been talking about for the last couple of quarters. Most of that space doesn't come back until third quarter and a lot of it even into fourth quarter. So getting it re-leased before the end of the year is going to be very difficult. So long term we do expect to get back up to 90%. But at the moment, it would be a real challenge to be at 90% at the end of the year. That said, we do have some hope that we can offset some of that elsewhere. More than a year ago, 1.5 years ago we started telling people about all the known vacates that were coming up at Maitland and yet somehow Maitland's occupancy is up slightly from last quarter. We've done actually quite well at Maitland for the year and we actually have some momentum there. So we're still doing some leasing there. You've seen the occupancy growing at 1800. We continue to hope that that's another location where we will continue to see that happening in the midst of a market where there is not much leasing going on and we're getting far more than our fair share. And then we've got some targets and some goals at Iron Point, which we've been telling people for a very long time. We had a number of known vacates during 2023. Those all did vacate. But we're building out a spec suite and a tenant amenity center and we would hope to lease all of the spec suites in that center during the coming year in 2024, hopefully be able to make up for some of what we're losing elsewhere. So again it would be a challenge to be at 90%. We're going to be really targeting 88%. Could that be 87% or 89%? Yes, it absolutely could. But just trying to give you a little bit more color around that question so you can draw your own conclusions better.

Next, we have Derek from DBS.

Dave, can you hear me?

Yes, we can.

I got a few questions here. I'm just wondering about your recap plan, right? So should we be thinking about a potential funding gap that you may face with your lenders in financial year '24?

So in terms of funding, one of the considerations in coming to the decision that we did was really looking at funding for 2024, what we have remaining available on RCFs committed/uncommitted, what banks would really expect to fund under an uncommitted RCF and that sort of a thing. And that's where we came to the conclusion that while the limits are truly 50% both within our covenants, within the regulatory limits and the rest; the banks because of primarily what they've seen happen with at least one of our other competitors are very reticent to lend against U.S. office above 45%. So that necessitated equity from somewhere. We talked about all 3 options we considered. But the option that we have moved forward with, which we really do feel strongly is the best option. And while I imagine most of you on this call feel a little bit of a sense of shock about it, that was our first response to it too. But after digesting it, spending time working through, we really do feel good about this choice; but we also think it's the best chance we have of alleviating any future funding options. So by withholding the distribution, retaining the distribution from fourth quarter and then first and second quarter for 2024, that should provide us with in the neighborhood of $60 million a little bit over of capital, which would exceed the $60 million planned spend for 2024. Suspending through 2025 should provide somewhere in the neighborhood of $40-plus million additionally and then we've also got availability under committed RCFs and other cash on hand. Between all of that, that should cover all of our capital needs for 2024 and 2025. Our Board was very diligent in going through all of this with us, with the management team and together really decided that we wanted to come up with a plan that was not going to be short term in nature, which would actually resolve the problem and this option has that advantage. So we really spent a lot of time talking through what this means for us on a go-forward. Are we going to have to do something else? The conclusion for an RCF was we would absolutely have to be back by the end of the year or in 2025 to unitholders and that was just untenable. We wanted a complete solution between all of us; the Board, management; and we spent a good deal of time making sure that we feel like this gets us there.

Okay. Just to clarify this. So you mentioned $60 million and $40 million in '24, '25, this is CapEx needs, is it?

So the $60 million plus in 2024 would be the distribution that would be retained and coincidentally about $60 million of capital for 2024. For 2025, we'd be retaining $40-plus million of distributions with a capital need of about $50 million. Going into all this, we have some cash on hand and we've got some availability on RCFs and we would be over $60 million in 2024, which is how we believe that should be sufficient to cover 2024 and 2025 capital needs of $60 million and $50 million, respectively.

Yes. And so maybe to add on by using the available cash or operational cash to fund the CapEx, we can keep our leverage below the 45% mark and that is now seen as very credit positive from our lenders' perspective.

Got it. You need to spend $100 million on your portfolio in the next 2 years. Is that for TIs and upgrades? Your value of property is $1.4 billion. I'm just curious why the significant amount.

Yes. So it is for primarily tenant improvements for new leasing, speculative suite build-outs which would result in we expect new leasing, a lesser amount on AEI type things. We've spent most of that money over the last several years building out the AEIs. We had 2 major AEIs we were planning for this year, one at Iron Point that I talked about a moment ago in response to Jon's question and then we had another one at Bellevue Tech Center. The one at Bellevue Tech Center we are going to defer to try to preserve capital because we think we can better spend it elsewhere. One of the issues we've been running into over the last couple of years is just the increasing cost to build space. So it's not that we're throwing TIs at folks to try to bring them in. To build the same quality space is costing us 20% more and in certain markets like Seattle maybe even more than 20% above what it used to. So part of that just represents the growth and because we've got significant role at Plaza, which is our highest cost and by far our highest revenue per foot building. That's a piece of why this is going up or those numbers sound as large as they do. I mean just in general, there is some inflation that has happened with TIs and the like. So we are being very strategic like I mentioned. At this point we're pulling an AEI at Bellevue Tech. That doesn't mean we won't do it later in the year. If we find some tenants that really want the space, of course we'll build that out as well as some of the amenities and the single building that is there that we got back from TerraPower that they were previously using as their temp space while we built out their final space that they're now in. But for now, we're going to postpone it. So it really is all capital that we believe is really necessary. We've pulled some things that really don't need to be done this year or were like to haves rather than need to haves. But at this point, that really does represent what we think needs to be spent if we want to try to have a chance at being 90% and still strong NPI at this portfolio.

Got it. David, sorry for harping on this. I'm just curious if you talk to your lenders at this point in time given where [ roles ] have fallen, are they happy to refinance at similar LTVs or there is a need to say find additional capital for that funding gap?

No. It's a great question and it is one of the big concerns that the Board and management had and discussed and quite frankly is a big reason why you saw us delay the announcement and coming to this because we wanted more clarity if we could get it from banks about what this decision would mean on their behalf. So while I can't tell you that we have commitments from any banks, we have 4 loans that mature over the next 2 years, $30 million and $45 million coming up at the end of 2024, and then 2 additional loans coming up in 2025. I will say we have spoken to all of those lenders. They view our decision to voluntarily make a recapitalization plan that retains equity by suspending distribution as very positive. I would say the indications at this point are that we would expect to be able to refinance the debt at current levels. There's no guarantee on that point, but we are working diligently on that already and that would be our expectation for now that they have seen, they understand and we've discussed this decision with them and we're pretty positive on our ability to refinance at the current levels.

Got it. Sorry, just 2 more. I'm just wondering whether the revals talking to valuers today see more downside potential in the coming end of this year given where rates are going? I'm just wondering.

We haven't spent much time talking to appraisers about forecasting for the end of the year. Neither they nor we are willing to give real opinions about where values are going to be or what's going to happen. If we ask them today, they would say we just gave you our best estimate of values and these are long-term stabilized values based on long-term stabilized cap and discount rates based on our projections of leasing and operations at the buildings. So asking them what they think is going to happen, they would have to tell us values will remain consistent unless there's major changes in operations or the interest rate environment. To try and do my best to answer your question. I would say interest rates are in a downward trend in most people's minds. We all expect to see them start to come down. The question is when that starts and how far that falls this year. I personally do not believe rates are going to fall enough to change cap and discount rates significantly in 2024 by the end of the year. I hope I am wrong and that the Fed cuts much more on the higher side than the lower side and we get to a more normalized interest rate environment. But if rates were to fall 100 basis points, I don't think it changes cap and discount rates for most appraisers because they're using stabilized rates. We saw rates increase by hundreds of basis points during 2023 and cap and discount rates on average for us went up about [ 50 ]. That tells me they would need to see some pretty big rate changes to change their cap and discount rates, which seems fair to me. It means they didn't take a knee-jerk crazy reaction and expect interest cap rates and discount rates to go up long term. They saw them going up, and they expect that to be short term and to stabilize. So I think we should expect things to be relatively stable. If we can hit the occupancy targets that we have driving the NPI that we expect, which is what they've based their appraisals on, we would expect to see relatively flat valuations. But I'm going to take it one step further and tell you as we look forward, does that mean we'll get back every dollar of capital we invest into the portfolio in 2024? I don't know. If the values remain pretty stable and we spend this capital and it maintains the occupancy and NPI, which is our hope and our target, we may not recoup that piece of investment, but it would be crazy not to spend it. I mean essentially that could put us in the position we were in in 2022. When you recall if you just did a year-to-year comparison, we didn't have an impairment value. It showed a net increase and that's when we started showing, guys, you have to consider capital spend and that's what drove our minor loss for revaluation for 2022. That could remain true in 2024. Hopefully, by 2025, rates have fallen enough that we do see some benefit to cap and discount rates and even if we're only hitting our targets, we might see some improvement in value. We would hope by then to be recouping the capital investment in 2025 if not do a little better than that.

Got it. Last one for me. I'm just wondering about the holding tax impact for nonpayment of dividends. Do you have a sense of that for now?

Currently I mean based on what we see for the first half 2023 distribution that we made last year is only about $100,000 plus. So what that means is that we will continue to be very diligent in terms of asking our investor to submit the tax form, which will be valid. Once it's validated, the tax forms will be valid for at least 3 calendar years. So that's why we want to pass the message out that please for any new investors coming in to us this year and late last year, they should really submit the forms and then we will minimize the withholding tax impact as much as possible.

And by what Andy says, what he really means is we're going to be even more diligent and we're going to pester people until they turn these forms in.

Got it. So there's no tax implication for nonpayment of dividend. Is that the way to look at it or you have paid? How is it? The money you get out of U.S., you're saying that you pumping back to U.S. Correct?

So the only tax implication is really the portfolio interest assumption where we need to stream out the KORE interest income from the U.S. to Singapore and the impact is on that gross amount in the company interest income.

Next we have Vijay.

I think it's definitely a shock, but I can understand where some of this coming from. Firstly, I just want a bit of clarity in terms of this tax treatment. As per the REITs regulation, REITs has to distribute 90% of the taxable income for tax transparency treatment and you haven't breached any...

Vijay, I have to interrupt you, I apologize. We have some kind of a crazy announcement that was going on in our office building and I could not hear your question. It started just as you started talking. Would you mind, I really apologize, repeating the question?

Sure. Again my question is in terms of the tax treatment. I mean you haven't breached any of the debt gearing covenants or gearing covenants and you are supposed to distribute 90% of the income according to the REITs Trust. So how are you not paying this? Is it because of the tax structure you are having that the equity amount -- I mean the amount which is channeled through the equity structure is the one which is eligible for the tax? Are you still paying the taxes for the corporate tax because of withholding the dividend?