KORE US REIT (CMOU) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining KORE US REIT's Half Year 2026 Financial Results Webcast. My name is Sheryl, and I represent Investor Relations for KORE. Joining me today are our Chief Executive Officer, Mr. David Snyder; and our Chief Financial Officer, Ms. Ai Lin. Before we begin, let me run through some housekeeping matters. [Operator Instructions]. Today's session will begin with a summary of key highlights, followed by an overview of our financial performance, portfolio updates and market outlook. We will then open the floor for Q&A. Without further ado, I will now hand the time over to our CEO, Dave.

Thank you, Sheryl. Good morning, everybody. Let me begin with a brief overview of KORE's first half performance. We delivered our strongest first half leasing performance since listing, signing more than 550,000 square feet of leases, equivalent to 11.5% of portfolio NLA. This reflects KORE's concentration in the right markets, investment in high-quality amenities and space, continued demand for high-quality amenity-rich office space and the strength of our tenant relationships. We also advanced targeted asset enhancement and spec suite initiatives across the portfolio, including the successful repositioning of the lobby at 10800 Plaza buildings, which has supported leasing and generated strong interest in our new spec suite offerings. Financially, KORE delivered stable performance with income available for distribution increasing 2.1% year-on-year to $20.4 million. Following the completion of the recapitalization plan and the early resumption of distributions, the Board has declared a distribution of USD 0.04 per unit for the first half of 2026. On the capital management front, we strengthened our liquidity position with a new $40 million committed revolving credit facility. More broadly, recovery momentum in the U.S. office market continues to build, supported by limited new supply and improving supply-demand fundamentals. Now I will turn it over to Ai Lin to cover our financial highlights.

Thank you, Dave. Slide 4 is a summary of KORE's financial performance for the first half of 2026. Net property income rose 6.1% year-on-year to $43.1 million. Excluding noncash adjustments such as the amortization of straight-line rent, lease incentives and amortization of leasing commissions, which have no impact on income available for distribution, adjusted net property income was 10.2% higher year-on-year at $83.6 million (sic) [ $45.6 million ]. The increase was due to higher one-off termination fee income, higher other operating income resulting from recognition of restoration fee received and higher cash rental income, partially offset by lower recoveries income. Finance and other trust expenses of $17.5 million for first half 2026 was higher than first half 2025 by 8.6%, mainly due to higher finance costs following the expiration of interest rate swaps, partially offset by lower floating interest rates. Income available for distribution increased 2.1% year-on-year to $20.4 million for first half 2026. The manager is pleased to declare a distribution of $0.004 per unit for first half 2026, representing a payout ratio of approximately 21%. Slide 5 is a snapshot of our balance sheet. As at end June 2026, total assets remained stable at approximately $1.4 billion. NAV also held steady at $0.007 per unit. Slide 6 outlines our debt-related metrics as at 30th June 2026. Aggregate leverage stood at 43.3%, improving from 43.7% last quarter. Our all-in average cost of debt was 4.74% per annum or 4.91% per annum, including the amortization of upfront debt financing costs. Our interest coverage ratio remained healthy at 2.5x and both sensitivity scenario show the ICR staying well above the regulatory requirement of 1.5x. The weighted average term to maturity of our debt stands at 1.7 years and 58.2% of our loans were hedged. A 50 bps change in SOFR translates to an approximately $1.38 million change in income available for distribution to unitholders. Importantly, we strengthened our liquidity position with a new $40 million committed revolving credit facility and continue to make good progress on our refinancing efforts. We are currently in active discussions with our financing partners to refinance the majority of our 2027 debt maturities. Moving on to Slide 7. Unitholders can expect to receive their first half distributions on 29 September 2026. For the second half 2026, we expect the distribution quantum to remain broadly consistent with the current period, subject to prevailing market and financing conditions as well as interest rate movement. We'd like to remind non-U.S. unitholders to ensure that their Form W-8 is valid and up to date to avoid the 30% withholding tax on distributions. I will now pass the time back to Dave to provide updates on KORE's operational performance.

Thank you, Ai Lin. Turning to Slide 9. We executed 492,000 square feet of leases in the second quarter of 2026, representing 10.3% of our NLA. Renewals accounted for 90.6% of the leases signed during the period, significantly reducing near-term lease expiries, while the new leases exceeded vacates and contributed to a minor increase in committed portfolio occupancy to 85.3%. Portfolio rent reversion was positive at 1.5% for both the second quarter of 2026 and the first half of 2026, driven primarily by the renewal lease at Bridge Crossing in Nashville, where we secured an early partial renewal of the main tenant. As the tenant renewed a substantially smaller footprint of 69,000 square feet, we are actively repositioning the remaining 116,000 square feet for future lease opportunities and have several quarters to try to find new tenants before the space comes back in Q2 2027. Leasing demand continues to be supported by a diverse mix of industries led by the technology, advertising, media and information sector, which accounted for 23% of leases signed during the quarter, followed by medical and health care at 22%. I'll now walk you through the key occupancy movements across our assets for the quarter on Slide 10. At The Plaza Buildings, occupancy improved to 81.4% from 79.6%. Notably, we leased the final spec suite at the Greenhouse in 10900 Plaza Buildings, bringing all 6 spec suites to full occupancy. We also secured a 22,00 square foot lease at The Post, our new full floor of spec suites currently under construction. At Great Hills Plaza, we signed a lease for a 7,200 square foot spec suite currently under construction, highlighting continued demand for high-quality, move-in-ready space even before project completion. Westmoor Center recorded approximately 10,200 square feet of expansion leases during the quarter, but that was offset by the departure of a known vacate of approximately 17,700 square feet. At Iron Point, we secured a new lease and completed an expansion with an existing tenant, contributing to the increase in occupancy to 82.6%. At the Westpark portfolio, we are actively marketing the space that Meta vacated in the first quarter and are currently in discussions with prospective tenants to backfill a portion of the vacancy. I'm sure we will be announcing some good news at Westpark shortly. To drive occupancy growth across the portfolio, we continue to execute a focused leasing strategy centered on enhancing asset competitiveness and delivering move-in-ready space solutions to capture tenant demand. First, we are repositioning assets through targeted upgrades and reconfiguration initiatives. A good example is Bridge Crossing, where we are converting the property from basically a single-tenant configuration into a multi-tenant environment, enhancing leasing flexibility and broadening the potential tenant base, which will also reduce tenant concentration risk over time. As part of that process, we will be centralizing and substantially improving the tenant amenities. Across the portfolio, we are also advancing asset enhancements. Current projects include an outdoor amenity refresh at Westech 360, upgraded first floor furnishings and a fourth floor renovation at 105 Edgeview, renovations to interior common areas and expanded outdoor amenities at Iron Point and a significantly upgraded lobby experience at 1800 West Loop South. Second, we continue to execute an active spec suite strategy where we see clear demand. Building on the success of our earlier projects, we are currently completing the build-out of The Post, a full spec suite floor at 10800 The Plaza buildings, planning the conversion of a full floor spec quality suite into 3 spec suites at 10900 The Plaza Buildings and developing 2 spec suites each at Westech 360 and Great Hills Plaza. Together with our ongoing leasing efforts, these initiatives support our target to end 2026 with occupancy broadly in line with the level achieved at the end of 2025, around 87%, even with the known vacates in the second half of 2026. These initiatives may also help us to replace the known vacates of 204,000 square feet in 2027 and hopefully lead to increasing occupancy in 2027, even with the headwinds of significant known vacates. Slide 12 provides a good example of how targeted asset enhancement initiatives can translate into tangible leasing outcomes. At 10800 Plaza Building, we completed the repositioning of the lobby by converting a former bank branch into modern tenant amenity space and additional leasable area. The lobby transformation has significantly enhanced the overall arrival experience, improved the property's appeal and strengthened its marketability. Importantly, these efforts have already produced positive leasing results. Newly created lobby space has been leased. And as mentioned previously, we also secured one lease for one of the spec suites at The Post on the third floor of the building that is currently under development before June 30, and we leased the second suite in July. We continue to see strong tenant interest in the remaining spec suites under construction. Our spec suite strategy has consistently delivered positive leasing outcomes across the portfolio. One of the key advantages of this approach is that it requires lower long-term capital expenditures, though the upfront cost is typically higher. It also allows us to respond more quickly to tenant demand and reduces downtime, which results in more rent over time. It can also generate higher rental rates. To date, we have achieved the full lease-up of all completed full spec suite floors across the portfolio. Examples include 1800 West Loop South, where we repositioned underutilized space into a premium market-ready offering. Iron Point, where a major vacancy was successfully converted into a flexible spec suite program and The Greenhouse at 10900 Plaza Building, where all 6 spec suites have been leased. Encouraged by these results, we have more than 43,000 square feet of additional spec suites currently under development and to be delivered by the end of 2026, with approximately 28% already leased ahead of completion. We'll continue developing additional spec suites in the appropriate locations as we move into 2027 as well. Slide 14 highlights our latest spec suites project, the Post at 10800 Plaza building. The Post will feature 6 studio style spec suites together with a dedicated amenity hub, including meeting facilities, shared workspaces and breakout areas exclusively for the use of tenants on that floor. We are targeting completion at the end of the third quarter of 2026, and as mentioned previously, have already secured signed leases for 2 of the suites before any interior walls have even been constructed. This early leasing momentum gives us confidence that The Post will further support occupancy growth at The Plaza Buildings and will lead to additional spec suite development at the property. KORE's portfolio remains well diversified across geographies and industries. The majority of our portfolio by NPI is in growing tech hubs such as Bellevue, Redmond and Austin as well as Denver, which is a major beneficiary of the expanding aerospace and advanced technologies ecosystem. The table on Slide 16 shows our top 10 tenants. You'll notice that the Homeland Security has moved up in the ranking this quarter, reflecting additional space taken at One Twenty Five. Firstly, Comdata's contribution to CRI declined following its partial renewal and footprint reduction at Bridge Crossing that will take effect in Q2 of 2027. Overall, the portfolio continues to benefit from a diversified tenant base with low concentration risk. Our top 10 tenants account for only 27.7% of CRI and 24.6% of NLA with no single tenant contributing more than 3.8% of cash rental income. That is substantially lower than our competitive set. Slide 18 reflects the structural trends in the U.S. office market, which are broadly consistent with the recent past with the same key themes playing out. Supply remains a positive contributor with limited new development and office conversions helping to support improving market fundamentals. At the same time, demand recovery remains selective with leasing activity concentrated in higher-quality assets with strong amenities in business-friendly markets. Moving on to Slide 19. The U.S. office market continues to show signs of gradual recovery with leasing fundamentals improving and supply pressures easing. Over the past 12 months, net absorption reached its strongest level since 2020, providing further evidence that demand is gradually recovering. On Slide 20, we address the recovery in office demand. What we are seeing is a clear shift towards spaces that incorporate individual workspaces while also including spaces that support collaboration, employee experience and health and recreation. According to CBRE's latest Global Workplace survey, amenity space has increased by over 120% since 2021 and now represents 22% of office space, more than double the 10% share seen in 2021. At the same time, the share of space dedicated to individual workstations has continued to decline, while collaboration and support spaces have increased. This reflects how occupiers are increasingly prioritizing employee experience, team interaction and workplace utilization when making real estate decisions. These trends reinforce demand for high-quality amenity-rich office environments, which aligns well with KORE's portfolio and our ongoing asset enhancement strategy. Today, the majority of our properties offer amenities such as tenant lounges, conference facilities, fitness centers and outdoor collaboration spaces with many also providing food and beverage options. Next, Slide 21 highlights a structural trend that continues to support demand in our markets, corporate migration to lower-cost, business-friendly locations. Since 2018, more than 700 corporate headquarter relocations have taken place across the U.S. with Texas and other Sunbelt markets among the largest beneficiaries. Our recent Fortune 500 example is ExxonMobil, which moved its legal headquarters from New Jersey to Texas in 2026. Given that Exxon was founded in New Jersey more than 140 years ago, the decision underscores the increasing attractiveness of Texas as a corporate hub for major companies. Other examples include Samsung Electronics America relocating its U.S. headquarters to Plano, Texas, part of the Dallas MSA, to support its long-term growth strategy and access to the region's deep technology talent pool. Similarly, Public Storage relocated its headquarters from California to Frisco, Texas, also part of the Dallas MSA, attracted by lower operating costs, a favorable tax environment and strong population growth. These examples demonstrate that the migration of major corporates toward growth-oriented lower-cost markets remains a powerful and enduring trend. Importantly, for KORE, many of our assets are located in markets such as Dallas, Austin, Nashville and Orlando, which continue to attract corporate expansion, job creation and investment, providing supportive backdrop for leasing demand over the longer term. Slide 22 addresses concerns around AI and office demand. Based on what we're seeing today, the impact remains broadly positive. AI-related layoffs account for only a small portion of overall workforce reductions, and it remains difficult to distinguish AI-driven job cuts from broader cost optimization initiatives. In fact, AI currently seems to be supporting office demand. In the first quarter of 2026, technology companies accounted for almost 23% of U.S. office leasing activity, the highest among all sectors. Since 2019, AI companies have leased more than 20 million square feet of office space across San Francisco and Silicon Valley alone. As AI investment shifts from experimentation to large-scale deployment, demand is growing in markets with deep talent pools and innovation ecosystems, including Bellevue, Redmond, San Francisco and Austin. While some tasks may be automated, AI is expected to drive net employment growth of approximately 7% globally by 2030 as job creation more than offsets displacement. Overall, this is likely to reinforce demand for collaboration and high-quality, well-amenitized office space. To conclude, while the U.S. office recovery remains selective, the key demand drivers we discussed today are aligned with KORE's portfolio positioning. We own a high-quality portfolio located in key growth markets, benefiting from corporate migration, population growth and business investment. Supported by proactive leasing, targeted asset enhancements and disciplined capital management, KORE has consistently maintained occupancy above major U.S. gateway market averages since IPO. And we believe KORE is well positioned to capture the recovery in office demand while creating long-term value for unitholders. And with that, I'll hand it over to Sheryl.

Thanks, Dave. We will now take questions. [Operator Instructions] Derek, you may ask your question.

Congrats on delivering ahead of my estimates. This is a good sign. I wanted to ask a few questions, right? I understand in your -- I mean, I hear you talking a lot about the spec suite strategy. I think it's working out, maybe specifically to The Plaza Buildings, right? I think it's taken up. Could you give us a sense about the rents that you have been able to achieve there for your spec suites versus typically what you could get for building? And secondly, does your tenants -- the new tenants will take up the spec suites, how long typically are they available for the property? Yes. That's my first question.

Well, that sounds like 2 questions actually. So let me take the first one first. In terms of the rates that we're getting at Plaza for spec suites, typically, our rates at Plaza are asking rates, I guess, maybe somewhere typically around $44 for the portfolio. The spec suites that we're doing right now, we have actually been able to achieve I think probably the highest rents that we've ever had at Plaza buildings. And mind you, that's -- we used to call the U.S. Bank building, the 10800 building. We just redid the lobby at, which is the smaller floor play, historically considered slightly less attractive with fewer amenities, we're fixing that, but there's still a lot of money to the building. But we're hitting things like $47 on that for a 2,200 ish square foot lease. So we're feeling really good about the rates there. But the rates really are not a big factor. I mean figure 2,200 square feet and say we're $3 above. It's really not going to contribute a ton. The biggest benefits are going to be when we turn that space, we're going to have much less downtime. So typically, if we turn a space, not a spec, we're going to have to do a build-out for a tenant once we find the tenant. And that's probably a 6-month build-out. And so going without rent for 6 months can be tough. We find that many of our spec suites, we can lease and have anywhere from 0 to maybe 1 month downtime typically, sometimes it goes a bit longer. So that means, in this case, you're talking about $47 for 6 months, so half of that amount per foot. So that's a huge savings and then not having to spend as much when we turn the space because we're only doing basically carpet and paint, maybe only paint in some cases, if it's a short term, then we're saving a ton of money doing it that way. So in terms of the leases that we typically sign at Plaza, I'd say normally, it's 3, 4, 5 years, the spaces that we're signing in the spec suites aligned with that. at somewhere between 3 and 4 years for the couple that we just signed for The Post building, which -- that shorter time frame also is typical for us with tech tenants, also typical for us in Plaza. And so that downtime benefit really can make a big difference in a place like that where we tend to have shorter lease as well.

I see. I see. Sorry, I missed your -- what you mentioned, but typically, spec suites, you get a premium of $3 to $4 per square foot?

I would say we don't have the answer for that. What we've gotten at Plaza right now is a premium of about that in terms of what we're leasing The Post for right now. I think in the portfolio, we're going to be working through some of our history so that we can actually provide some information along those lines next quarter, and we'll probably provide some more information even when we get to fourth quarter and year-end. But we're going to try to put some numbers around the benefits to that downtime and the rent that we would get there, the cost savings over time from turning the space at lower cost on a go-forward basis and then also in terms of rent rates and the benefit we get there. So I think over the next couple of quarters, we're going to be able to start giving pieces of that out and really help people understand better the significant benefits that we see from spec suites.

Got it. Got it. Got it. Okay. My second or third question, I was just curious about your vacancies at The Westpark and Westmoor. Could you give us some color how you see it trending by the end of the year?

Yes. Let's go ahead and start with Westpark. So I think I said even in my comment that we expect to have some good news there shortly, which we do. I think we will have a decent amount of leasing at Westpark before the end of the year. We said that we're hoping to end the year at around that same 87% level that we ended last year, even with getting back all the Meta space, other known vacates, all the things we've dealt with this year. I think that's going to, in large part, be coming from Westpark. So I think that we will see at least a couple of leases there. It may not all be Meta space. We had one other large space that was vacant there, about 32,000 square feet. We've got 3 buildings, Meta occupied all of the couple, most of another. So I think some combination of a couple of those will probably happen this year, and then I would expect that the remainder of that could happen in 2027. And as for Westmoor, we've got a little bit of vacancy that just came back on that 17,000 square footer. But we've had a little bit of leasing there. We've got High Ridge, which is the tenant in one of the buildings. They have done a forward renewal where they're going to be giving back some of the space at maturity. And we have or are about to finish leasing basically all of that space back up. So I don't expect that we will actually recognize any impact from the space that they're going to be giving back. So I think that's a positive for Westmoor in terms of keeping things strong. We've had one tenant there that's done some expansions. We've got some other tenants that are reaching out. One of the fairly significant. It's not one of the 2 biggest, but one of the fairly significant tenants has been talking to us about renewing a little bit early, things like that. So I think we're feeling good. That market is a little tough, but we've got one building basically that's vacant out of a 6-building portfolio, nearly vacant. That is the one we're focusing on. We've redone the lobby there, and we have been approached at least -- by at least one tenant about taking some space there, some expansion space into that building. And then there has been some amount of touring there. So I don't know exactly the timing, but I do expect to eventually see some space leased at Westmoor that's going to help us, but I think that's more likely going to be 2027. And I feel pretty good about leasing some space there in 2027.

Okay. Got it. Got it. Sorry, just one more question. I know Vijay is waiting. But I was just curious about your performance. You mentioned about the termination income, right, this first half. If you strip it out, how would that -- how would your NPI look year-on-year?

Thanks for asking Ai Lin that question. I appreciate it.

So we mentioned that there is a one-off termination fee income as well [indiscernible] statement cost, restoration fee that was all one-off in nature. So if we strip that out, adjusted NPI is probably a bit lower, but this is mainly coming from lower recoveries because there are some timing in terms of the recoverables -- sorry, recoverable expenses as well as some higher corporate expenses, but this is offset by the higher rental income. So in terms of cash rental income that should be high.

Vijay, you want to ask some questions?

Good morning, Vijay.

Congrats, I think, a decent first half considering the volatility in the market. Just a couple of follow-up. Maybe firstly, on Derek's question -- earlier question of reinstatement and the one-off termination. It was about $2.6 million, if I'm not wrong. I just want to confirm that this amount has also been taken off from the distributions because your flow-through from NPI to distribution seems to be a bit lower.

Vijay, yes, you are right because it's capital in nature. So yes, it has been deducted from the distribution.

Okay. Can I just confirm the amount? It's $2.2 million -- somewhere around 2-plus million, right?

For the restoration fee, it's about $2.3 million.

Okay. Okay. Got it. Okay. Since you are on the line, I think maybe one more question on financing cost. Maybe the new $40 million loan, is this an additional facility? Or is it an existing revolver refinancing? And possibly, what should be the financing cost, especially with the recent interest rate increase in the market you're seeing? And what could be the guidance for '27 and '28?