We have CEO, Mr. David Snyder, and CFO, Mr. Andy Gwee. We will start off with the webcast with an overview of KORE's financial and operational performance for full year 2024, followed by the question and answer session. 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. I will now hand the time over to the CEO, Mr. David Snyder.
Thanks, Lilian. Good morning, everyone, and thank you for joining us today. Let's go ahead and start on slide four of the presentation. Here we present KORE's full year 2024 key highlights. We ended the year with our portfolio committed occupancy going back up to the 90% level, an increase from last quarter's 88.7%. The majority of the leases signed were in the Seattle, Bellevue, Redmond, Denver, and Orlando markets. In 2024, we leased a total of 938,655 sq ft of space, equivalent to 19.6% of the portfolio NLA. Our portfolio value remains stable year-on-year at $1.33 billion as of 31st December, 2024. Taking into consideration capital expenditures and tenant improvements for 2024, there was a fair value loss of $46.7 million.
The aggregate leverage is well within regulatory limits at 43.7%, with an interest coverage ratio of 2.6 x. Adjusted NPI was 4.7% lower year-on-year, and income available for distribution came in 8.8% lower than 2023. For the second half of 2024, there is no distribution declared in connection with our recapitalization plan. On slide five, we summarize our property valuation. There was generally an increase in capitalization discount rates across the portfolio, though these were partially or fully offset by higher rental rates and occupancy at many of the properties, which achieved stable or higher valuations. Year-over-year change was actually up $0.1 million for the entire portfolio, driven by Maitland. Including capital spent, the loss was $46.7 million.
I will note that three properties recovered all of their capital spend, and one with no capital increased by the very $0.1 million that was the net change for the year. Needless to say, we are pleased with the result, which was in line with our expectations and substantially better than our peer that already announced their valuation. We hope this will help alleviate concerns some in the market have had regarding our valuation risk. With that, I'll turn it over to Andy.
Thanks, David. On slide seven is a summary of our financial performance for the second half of 2024 and the full year 2024. For the full year, adjusted NPI was down 4.7% year-on-year. That's mainly due to the higher vacancies at the Plaza building and Iron Point , which you can see from the movement in the vacancies. Dave has always highlighted or expected full year as a beyond that. Year-on-year, there's also an increase in the repair and maintenance expenses. Income available for distribution reduced by 2.8% year-on-year. That's mainly due to the lower cash NPI+ the higher financing costs. On slide eight is a section of our balance sheet as at the end of full year. NAV is at $0.69.
We also assess at $1.4 billion. Slide nine is our capital measures slide. Our aggregate leverage was 43.7%, and interest coverage ratio was 2.6 x. Point average cost of debt was 4.45% per annum, or 4.33% per annum when excluding the non-cash amortization of upfront debt financing costs. Weighted average term to maturity of our debt stands at 2.4 years. As at 31st December 2024, 100% of the loans were hyper secured, with about 90% maturing between 2026 and 2028. Moving to slide ten. On the left-hand side, you can see the sensitivity to the changes in the floating rate.
66.6% from our non-current loans has been hedged, and every 50 basis points change in the interest rate translates to a change of about $1 million in income available for distribution. On the right side, in November last year, MAS announced the requirement for the step-up disclosure on ICR. Although the disclosures only apply for financial periods ending on or after 31st December 2025, we have opted to include the additional sensitivity analysis ahead of the requirement. As you can see in both scenario one and two, our ICR remains well above the regulatory requirement of 1.5 x. With that, I'll hand over back to Dave.
Thanks, Andy. Our investment focus on key growth markets continues to be supported by strong demographic trends. As you can see on slide twelve, all but one of our markets were in the top twenty markets to watch in 2024. We haven't yet seen that list updated for 2025. What has drawn companies and individuals to these cities are their low income tax rates, lower cost of living, better employment opportunities, and more attractive lifestyles, among many other factors. Our strong relative valuation results speak to both our markets and our investment leasing decisions. Slide thirteen illustrates the changes in committed occupancy by property. This quarter, KORE's committed occupancy increased to 90% from 88.7%, as 10 out of 13 properties had stable or increased occupancy.
We continue to have a large volume of known vacates in 2025, including a couple of large ones in the first quarter at Plaza and Westmoor, with more to come at Westmoor later in the year. Occupancy will fall in the first quarter and will face more pressure later in the year. Much like in 2024, we hope to end the coming year with occupancy in the high 80% range. As you can see on slide 14, KORE's occupancy rate remains well above the U.S. average, the gateway cities, and both of our peers in Singapore. Moving on to slide 15, leasing momentum continued to be strong in the fourth quarter of 2024, with around 217,000 sq ft of space leased, representing 4.5% of portfolio NLA.
The total leased space for 2024 of 938,655 sq ft, or 19.6% of portfolio NLA, is the highest we have achieved in a year since the IPO and has surpassed pre-COVID levels. Our built-in average annual rental escalation of 2.6% will continue to contribute some organic growth to the portfolio. Rental reversion for the fourth quarter was positive 1.7%, mainly due to two major new leases that we signed at Maitland Promenade and 125, partially offset by Plaza and Westmoor. The rental reversion for full year 2024 was negative 0.5%, mainly due to renewals at Plaza Buildings, Bellevue Tech Center, and Westmoor Center, partially offset by 125 and Maitland. Slide 16 highlights KORE's geographic and industry diversification. Our portfolio is anchored by the tech hubs of Bellevue/Redmond, Austin, and Denver, which contribute approximately 67% of NPI.
With about 51% of our tenants by NLA coming from the sectors of TAMI and medical and healthcare, our industry-focused diversification continues to allow us to leverage on these growing sectors. Turning to slide 17. Here we highlight our relatively low tenant concentration risk. This key differentiator is driven by the fact that we have over 390 distinct tenants, with no tenant exceeding 4% of portfolio cash rental income. The total contribution from our top 10 tenants is less than 30% of CRI. The majority of our top 10 tenants continue to be from established TAMI firms located in the markets of Nashville, Denver, and Bellevue/Redmond. On slide 18, you'll find a comparison of the last 12-month rent growth at the national level, as well as in our key growth markets and gateway cities.
Our key growth market average has now returned to exceeding the U.S. average by 0.2% after previously being on par with it in the last quarter. The gateway cities continued to underperform, but they are positive, and the back-to-office trends are now impacting many of the gateway cities, and their physical occupancies are on the rise, though nowhere near our markets, and their overall occupancy should be improving as well. Turnaround in gateways is one of the key factors we have postulated will lead to an improved perception of the overall U.S. office market, which should help us as well as hopefully begin an increase in lending to U.S. office, which would benefit the entire industry and eventually lead to the transaction market reopening. Moving on to slide 19. Here are the rent growth projections for the next 12 months.
The rent outlook for KORE's key growth markets is projected to be 0.3%, below the national average of 0.6%, but well above the negative 0.2% outlook for gateway cities. Slide 20 shows a comparison of the forecasted 12-month rental growth for our markets over several years in green against the actual average growth of KORE's key growth markets during those actual time frames in blue. KORE's portfolio rent growth has remained relatively stable during and post-COVID, regardless of the fluctuations in CoStar's projections, demonstrating the resilience of the portfolio and overall strength of its markets. Let's move on to the market outlook on slide 22. This slide highlights several U.S. economic fundamentals which indicate broad resilience in the U.S. economy. I'm sure you're all familiar with the information, the only big question on all of our minds is: What will the Fed do in 2025?
If I knew the answer to that, I'd be making a lot more money doing something else. Rather than postulate, I will just move on. On slide 23, we note that the U.S. office sales market is still not in the recovery phase. While recent rate cuts have introduced more liquidity, capital markets have not recovered. Office CMBS delinquency rates have surged by more than 250 basis points since Q3, marking the sharpest increase in recent years as asset valuations remain under extreme pressure with the lack of meaningful improvement. On a positive note, the overall sales investment volume increased by roughly 30% year-on-year, primarily driven by portfolio sales or office alternatives such as life science, medical office, data center and the like. However, when we exclude these categories, single-asset traditional office sales increased by only 10% year-over-year, matching 2010 levels of liquidity.
We hope Trump's back-to-office push, the trends we've been experiencing in our markets for some time regarding back to office and the improvements that seem to be happening in the gateways and elsewhere will lead to improvements by the end of the year. Moving on to slide 24, you'll see the general leasing activity in the U.S. by sector. The TAMI sector, which includes technology, advertising, media, and information, remains one of the key drivers of leasing recovery. This aligns with KORE's investment thesis, which focuses on the fast-growing TAMI, medical, and healthcare sectors across key growth markets in the U.S., while obviously having numerous typical office-using tenants in sectors like financial services and insurance as well. On slide 25, we cover the broad-based leasing recovery supported by return-to-office trends and organic demand growth.
In Q4, net absorption turned positive for the first quarter since Q4 2021 and marks the second quarter of occupancy gains since the onset of the pandemic in 2020. Next, we see the leasing momentum variance among different geographic regions is beginning to narrow as recovery becomes more widespread. Sun Belt markets are still leading the way with over 95% of pre-pandemic activity over the past six months, but gateway markets have recovered significantly, now reaching 76% of pre-pandemic levels in the second half of the year. In terms of interstate migration, Sun Belt states such as Texas, North Carolina, South Carolina, Florida, and Tennessee continue to be the most popular destinations for relocations. We also observed that office attendance policies have evolved, with many companies establishing regular office attendance requirements in recent years.
According to Fortune 100 office attendance policies, hybrid work arrangements now dominate, with employees typically required to be in the office three and a half to four days per week as of fourth quarter of 2024. On January 20th, the Trump administration issued a memorandum to the heads of federal departments and agencies to, as soon as practical, get their employees back at their respective duty stations full-time. A friend of mine who works for the federal government was told last week to be back in the office full-time by February 24th. As of today, that date just got changed to February 10th. Turning to industry trends, while artificial intelligence companies are a major driver of new demand, finance and legal firms have stabilized and began expanding in key markets, including the Sun Belt and New York.
Lastly, office using employment levels remain above pre-pandemic levels, reinforcing the positive trajectory in leasing activity. Slide 26 provides a recap of KORE's unique value propositions, including its strategic presence in several of the fastest-growing states and strongest markets in the U.S., its exposure to the fast-growing TAMI and medical and healthcare sectors, our highly diversified portfolio with low tenant concentration risk, as well as our resilient operations with substantial built-in average rental escalation for future organic growth. Finally, 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 unitholders who fail to submit their U.S. withholding forms and certificates. This would negatively impact KORE and its unitholders by reducing the income that could be repaid.
The manager would like to strongly urge all unitholders to continue to submit the relevant tax forms to reduce KORE's withholding tax burden. It is possible that once distributions resume, those that didn't complete their forms would have their distributions withheld to cover the amounts paid by KORE. Thank you for your time and attention. With that, I'll turn it back over to Lilian.
Thank you, David. We will now start the Q&A session. For analysts who have any questions, please feel free to raise your hand. We have John.
Good morning, David, Andy, and Happy New Year.
Happy New Year, John.
Happy New Year.
Two questions. Firstly, relating to occupancy, significant improvement at Plaza, Bellevue Tech Center, and also Maitland Promenade. Could you share some color in terms of any sizable new tenant and which industry sector they are from? Secondly, could you share currently what's the physical occupancy for your portfolio? Was there any improvement in Q4, and where do you see physical occupancy headed by end of 2025? Thank you.
Yeah. Thanks, John. Plaza Buildings, I think you mentioned, is one of those that we saw some improved occupancy. I just want to point out before we get too far into this, that we do have some known vacancy coming up in Plaza in first quarter, which will bring it back maybe more consistent to where it previously was. In terms of some of the new leasing, I'm looking for the detail right here on Plaza. For Plaza Buildings, we had just a couple of tenants. One a pretty good size at about 12,000 sq ft, another 2,000 square footer. In terms of what types of companies those were, that I don't have at my fingertips for those, but I think both of those are technology of some sort.
I don't have the details, but they're both tech companies of one variety or another. I think you also talked about BTC. That was a medical tenant that we brought in for BTC that we're seeing in there. I think we also have, showing up in at least the way we're showing the occupancy, a technology company as well, that we've picked up there. I think you also talked about Maitland, if that's correct. Maitland, we had an interesting pharmacy, medical healthcare sort of a tenant called AssistRx, that is taking a lot of space. I mean, in fact, all the space at Maitland that we picked up was due to that one lease.
It's interesting, they're more of a pharmacy delivery sort of a company, it's not like they'll be servicing folks right out of our building, but they will be doing all their deliveries and all their back office there. That was a big win for us. We really like their business model. We like what they're going to be doing, and they're taking an awful lot of space in a couple different locations, including the known vacates that we had coming up in that building and some other space that might have otherwise been difficult to use or reuse. We were able to connect a bunch of different spaces that building on the first floor that they took all of, which was super convenient for us. That was a big win.
Bellevue, BTC, the improvement is quite significant, I think something like eight percentage points. The two tenants must be quite sizable.
Yeah, they're fairly sizable, the big thing there is really not those two tenants. It's actually an expansion by TerraPower, our existing tenant. They picked up about 18,000 more sq ft in the building adjacent to the building that they fully lease. They continue to take additional space at that location. While we did build out their headquarters for them there in one full building, they've now taken a couple spaces, and we wouldn't be surprised if they take more in the future in the building adjacent to it, as space becomes available.
With regards to physical occupancy?
Physical occupancy is about 72%. It's maybe slightly down from where we were in the 3rd quarter, by about a percentage or so. These numbers are not exactly completely scientific in the way in which we calculate them. I'd say we're at a push. We're above 70%, which is at that point, let's just call it, we're three and a half days in the office, which is basically exactly where 70% sits. We're somewhere right around that. We're pretty happy with that performance.
In the queue box.
Well, yeah. Andy does raise a good point. Fourth quarter, it has a lot of holidays and a ton of vacation time, so it typically is physically occupied less. He raises a very good point. We've got Thanksgiving in the U.S., which is typically two to three days most people take off, which is not celebrated here. For Christmas and New Year's, you'll find a lot of people are off for not just the day before Christmas or something like that. Probably the majority of Americans take off the weekend in between. That's a good point.
Yeah. With the federal government moving to five days a week and then a lot of the large, big corporate like Amazon also moving to five days a week, what's your expectation in terms of physical occupancy and portfolio occupancy towards the end of 2025?
I think physical occupancy is going to remain for us within the 70%-80% range. Much like I've talked about before for folks, pre-COVID, if you were in a 90% occupied building, you probably only had something around 80% physical occupancy because people have vacation time, people are home sick, people travel for work, people go to meetings and seminars. Your physical occupancy is never anywhere near your actual occupancy. For us, if we're still somewhere, call it, if we're roofing at 90% as our occupancy number, then I think somewhere between 70%- 80% is where we'll still continue to sit for physical occupancy. Maybe ticks up a little bit more into the higher 70s, maybe even hits 80 periodically.
I think that's the right range and hard to change a range like that, regardless of how many employers are bringing people back, just due to normal life and business sorts of circumstances. If we're in that sort of a range, I think we're going to feel good about that towards the end of the year. In terms of how back office is going to drive leasing occupancy, that sort of thing, it's harder to say. For most of the markets that we're in, we've had most of our tenants in the office most of the time. As you know, and some that follow us know, we've had very high physical occupancy compared to most U.S. locations, certainly compared to Gateways for years, even immediately following COVID, even during parts of the pandemic. We've done quite well there.
I don't think we're going to see a pickup. We are seeing that happen in the Gateways. I think I touched on it in my comments, that they're seeing more physical occupancy. They're seeing more leasing. We're seeing more leasing volume in general in the U.S., and I think we'll continue to see expansions occurring, by businesses that are growing, and they'll be across various types of industries. Overall, I think occupancy for the U.S. as a whole should be ticking up. That should be a good thing. We should see that through all of 2025, and hopefully we'll see an acceleration during 2025.
Okay. For physical occupancy, 70%- 80% is already back to normal situation normalized?
Yeah, I think that is pretty normalized. I don't think you would've seen it much above 80 in a 90% occupied portfolio prior to the pandemic.
Thank you. Thank you, David, for the call. Thank you.
Thanks, John.
Thanks, John. Derek, you can ask your question.
Hi, Derek.
Hi. Morning, Dave. Can you hear me?
We can.
Hey, hi. Good morning, and Happy New Year, everyone.
Happy New Year.
Yeah, a few questions from me. I just wanted to get a refresh of your thoughts around your top 10 tenants. What are they, at this point in time, indicating to you? Are they likely to stay, or is there anything that we should take note of for 2025? Maybe that's my first question.
For the top 10 tenant list, I'm trying to pull up my top 10 tenant list. I'm not quite sure why I'm not finding it, but I just did. When we look through that, we don't have any that are expiring at the moment in 2025. I think the nearest term that we're going to have on that list that's expiring, and I guess the only one, is in Westpark. Meta had the opportunity to do some downsizing, I think it was about a year ago
maybe a little bit over a year ago on that portfolio.
Yep.
The only thing we got back from them was one extra kitchen that they were no longer using. They have multiple kitchens within their space. My view would be if they planned on downsizing, giving back space, that sort of a thing, we'd have probably gotten back more of what they were slough to give us.
Yep.
At that time, we did not. We also, just as a refresher for I think you know this, we probably have a couple people listening that don't. They have a major testing facility for Oculus that they purpose-built into.
Yep
one of the large spaces that they have with us. To our knowledge, that doesn't exist anywhere else, and they haven't been trying to build that somewhere else to the best of what we can gather. Our expectation is that while there might be some thoughts on their part about maybe not needing 100% of the office space, we, at this point, fully expect them to be renewing in the location for, we would expect, the majority of the space, potentially all of the space. We have not had detailed discussions with them about that as of yet.
Got it. Okay. Maybe if I were to broaden the discussion, right. We look at occupancies, I think you mentioned Plaza, you expect to see some weakness in the coming subsequent quarters. How about how should we look at occupancies as a portfolio? There are some weak ones in my view, Iron Point, for example, West Tech 360. What are your thoughts around bringing them up towards a more optimal level?
Well, you're just going to try to put me on the spot right away, aren't you? Well, I think we can try to answer those as best we can here. For Iron Point, that one is an interesting one. The market is actually quite strong. We're below market occupancy there, and that's because we got a couple of big spaces back, as you probably recall, very quickly over towards the early part of last year, I guess. We've had several tenants that have vacated there for various reasons. Some have been because they're in mortgage finance. Significantly, that's a big piece of it, and that has not been a real good business in the U.S. for a while. That one actually closed its doors. We've had a couple of others. One that's significant in home stuff has been an issue for us.
That's another area that, in that part of California, hasn't been doing incredibly well. We've had some hits there. We have redone our tenant amenity center there, which is located within one of the several buildings that we have on the campus. That amenity center is now, I would say, first rate for anywhere in the world, not just for Sacramento, certainly not for Folsom. In Folsom, it is by far the best. Fantastic little food area, kind of meeting area, place for people to gather, eat, drink, whatever, take lunches and breaks, break room, if you will. A real nice conference room. The fitness center went from being not bad to very nice. Along with that, we were able to lease a bunch of space in that building. What we're left with now is one single building that's adjacent to that-
Then quite a bit of space in our large three-story building. The issue we have is what we need are some big tenants for any or all of those spaces. So that's a matter of finding the right tenants, which will take a little bit of time. It is conceivable we will break up some of those spaces.
Yep
Potentially that standalone building.
Yep.
It breaks up well into something for three tenants. We'll give it a little bit of time here, maybe. I think the expectation is we will work on doing that. I would say occupancy here probably hovers to where it is to up some amount. I would think it's conceivable we could hit an 80% at Iron Point by the end of the year if we were fortunate in finding at least one fairly large tenant. Otherwise, we'll be just working on blocking and tackling, as we'd say in the U.S., doing the basics.
Yep
Bring that up bit by bit.
Yep.
The other one I think you mentioned was West Tech 360, on that one, I've got a very different sort of a view. I think we're going to have a good year at West Tech 360. Austin seems to be doing better. We've had some momentum at that property. Every spec suite that we've been building, we've been having success in leasing, we've got some others.
Okay.
The most recent one was leased before it was completed. For that one, my hope is to be into the mid-80s for that.
Okay.
My expectation is to be into the mid-80s for that. My hope is that we push above that level by the end of the year. I may be putting a little pressure on Jeff Rader if he's listening in, I'm not too worried about that because we feel good about what we're doing. We've completed the lobby renovations. We've got some excellent buildings and excellent space right there and one of our two really nice green sorts of locations. We've got deer running around the property. It's tons of greenery, beautiful views out most every window, central courtyard where the deer even come with a bunch of nice spots for people to sit, eat lunches, do all that sort of thing, which you can do in maybe six months of the year in Austin.
You wouldn't want to be doing it in the middle of summer outside, the rest of the year it's nice. We're hopeful for that one to see some good change.
Got it. Okay. James, can you just give us a guidance on TIs for this year? How is it trending? I understand there's some expiries and you've got cash on the balance sheet, right? I think sufficient to pay for the TIs that you expect to pay for this year.
Yeah. Are you asking just TI or you mean all capital expenditures as a whole?
Include CapEx. I just want to get a sense between the breakdown between TIs and whatever CapEx that you have planned.
That's what I figured. The total of that number for 2025 is going to be right at $50 million, which is, I think, what we were guiding to for the last year or so.
Okay.
Our budget for all of those things, including leasing commissions, the whole works, is $50 million for 2025. We've got a little bit of carryover of things that weren't spent. We may have started work on other things. We just haven't completed the projects from 2024, which we'll be paying this year as well. We won't spend all that $50 million in 2025 because obviously some of that is going to face the same issues at the end of 2025, and we'll make the payments into 2026. We're figuring that $50 million. We've got between cash on hand and available facilities, we've got the ability to cover all that, especially once you count in the expected income from the portfolio, which, again, was the main reason for what we did with the dividend suspension, was to provide that capital.
Between all those sources, we've got the $50 million covered.
Got it. Okay. Just one last one from me. I understand, Vijay, I'm sorry for hogging the mic, but your property values were stable, and I think it's a positive surprise. Can you just sense what valuers are saying? Did cap rates move, or what's driving the stability in asset values?
We did have cap rates that went up. On a direct cap method, we had seven of the properties had increases in their cap rates. For those for terminal cap rates, we only had four go up. When you look at a more stabilized way of doing this, we didn't have too many of our valuers that saw a need to increase cap rates with the risk-free rate remaining pretty stable and our portfolios remaining stable. We didn't see a big increase. The ones that we did see an increase in terminal cap rates, it kind of makes sense based on where occupancies and other things are, where we've seen some rates of vacancy. Discount rates, though, on the other hand, we did see eight of those go up. We saw a couple come down, a few remained flat.
Again, not a huge impact from all of that because we've got higher market rents. We've seen some rental growth in a couple of these markets as well. Occupancy is better than those appraisers would have expected last year. We've got a lot of positive things going on within the portfolio. We've got some pretty good stability. Aside from those known vacates that I've mentioned at Plaza and Westmoor, a lot of the leasing that's been done is now starting to contribute or will be in 2025 at some point. A lot of the leases that we've signed have been forward leases. In other words, things that will start in 2025, maybe even 2026, which gives appraisers a lot more comfort into the future. All of that was able to kind of maintain value where we were last year.
We wish we could have recovered all of the capital that we spent this year. We still think that capital was well spent. Had we not spent it, I can tell you we wouldn't have achieved anywhere near the leasing that we did for the year of 19%, which was, I think, pretty amazing. In most people's minds, that's kind of an unthinkable amount of leasing that was achieved in one year. We feel good. We hope this is now the bottom. We hope for 2025, and we can't forecast it. We can't tell people this is what will happen, but we hope for 2025, the capital that we spent will get recovered in our year-end valuations because the market should stabilize. Hopefully, interest rates will get a little bit better, regardless of what the Fed does. Hopefully, we'll see some stability.
Hopefully, that's going to be a positive trend, and once we see banks coming back in, which we expect to see sometime this year, that should lead to a market that stabilizes more and more transactions, more other things that will lead to more stabilization, even on the valuation front. That's hopefully a pretty good answer for your question.
Okay. Got it. That's all from me. All right. Thank you. I'll go back to the back please. Yeah.
Thanks, Derek.
Hi, Vijay. Sorry to keep you waiting. You can ask your question now.
Hi, Vijay.
Hi. Morning, Dave and Andy. Happy New Year, congrats on a very decent set of results in a, I would say, challenging market. Are you able to hear me?
Yes, we can. Thank you very much, and Happy New Year to you.
Yeah. I think a couple of follow-up questions. My first question is in terms of overall strategy. I think a lot has changed during the last quarter in terms of Trump's election, people coming back to office, more stringent mandate, interstate outlook. Overall, how has this changed your outlook for 2025? Is there any change in strategy in terms of divestments you would look at or a distribution timeline which investors should look out for?
At this point, Vijay, I think it's way too early to see a change. I'm not even sure Trump necessarily understands all the things that he's got in motion that change by the minute. Apparently, we were going to be starting 25% tariffs on Canada and Mexico on Tuesday morning, and that's been postponed a month. We're going to see a lot of this kind of stuff happening. At this point, we're not making any changes in our overall plans or outlook for the year. There's arguments to be made on all kinds of sides about what's going to happen to inflation. People are pretty clear, and I would be in their same camp, that if a whole bunch of tariffs get put on, inflation's going to go up.
People have some concerns about the fact that, what happens if Trump actually convinces a whole bunch of federal workers to quit and/or retire? What does that do to unemployment, and that sort of thing, and is that going to put pressure on things? Quite frankly, I'm not sure why that would be a disturbing thing. I think if we saw that pressure put on unemployment, it would give the Feds the cover they need to actually reduce rates, which would be good for us. I think we would treat that as a positive. We look at it as a positive that we are not getting those tariffs going on today. We'll wait and see what a lot of these other actual implementation items look like versus the way they're talked about, and maybe can talk more clearly on that in the future.
For now, we're going with business as usual with the hope that we will see at least a couple of cuts by the Fed, with the expectation that there may be none. We'll run our business that way and continue to invest in the properties as we need to to drive leasing, to the extent that we see the ability to bring in more tenants and that sort of thing from Trump's push. The one benefit for us, we don't expect to see more government entities coming into our buildings, given the locations that we're at. We have several GSA tenants. We don't expect more. Quite frankly, we don't want more. They're not great leases. That will benefit other markets.
That's going to benefit, I think, D.C. to some degree, even as Trump talks about pushing folks out into other markets, which I think would be good for the U.S. as a whole. That'll benefit other markets that have a significant amount of government employees and things like that to get them back into the office. Any strengthening there is going to help the market in terms of making banks more comfortable lending, making people more comfortable buying. That is what we really need to see and hope to see by the end of this year. As of now, we have no goals or intent to divest during 2025. I think we've talked about wanting to be able to do that by 2026.
I think the trends that we're starting to see, including Blackstone making a big announcement about an acquisition they'd like to make in New York, as well as some other transactions that seem like they might be happening, and some lenders that may be entering the market. That all bodes well for transaction volume picking up sometime probably in the second half of 2025, which would be right on target for what we've kind of projected and talked to people about for the last year plus, which would lead to us being in a good place to divest a building or two in 2026 as we hope to.
Got it. The focus would be on occupancy improvement and resumption of distribution in 2026 remains the same.
Sorry, I forgot to answer that last piece. Yes, for resumption of distribution, we haven't seen anything that would change our original intent on that, which would be resume in 2026. You're correct. Thank you.
Okay. Thank you. Thanks, Dave. I think, again, just back to the question in terms of return to office and more people coming back. Have you seen any instances where your tenants gave back a bit more space and now taking back that space? Or any tenants taking up more space just because they are calling more people to offices in your building, especially in Seattle?
I have not specifically seen folks that give up space and then decide that they want more space. We have certainly seen tenants who are expanding in their market. That piece is definitely happening. It's not like it happens every day, but I think for the last couple of years, I think we've talked about the fact that we've had multiple tenants expand in our portfolio, and we've had more expand than contract as well, which has been a real positive. I think we'll continue to see a little bit of that trend. Strong companies are always expanding, I think we'll continue to see expansion from some portion of our tenant base.
I think what's going to be really nice is when we start to see more of that happening elsewhere in the U.S., because I feel like for our markets, we've been seeing some of that already.
Okay. Just in terms of CapEx, I think last year you spent about $47 million, lower than your target of $60 million. Is that a savings or is that something which is deferred CapEx that would come in 2025?
Yeah. I think I touched on it a minute ago and maybe response to one of Derek's questions, but I wasn't specifically trying to address this point. Yeah, we have carryover capital that we've started projects that have not been completely paid for, there's a lot of that carryover that's going to get paid in 2025. The projected spend that we had basically all took place. There's a couple of things here or there that didn't happen, a couple of things that might have cost a little bit more than we'd originally budgeted. The number that we planned for 2024 did happen. The number we're planning for 2025, I think is going to get fully spent. Some of the payment of 2025 will carry over to 2026, just like some of 2024 carried over to 2025.
Yeah, we also signed a number of new replacements for spaces that are due to expire this year. We also renewed quite a fair chunk of the 2025 and 2026 expiries last year as well.
Okay, got it. Sorry, one last question. In terms of financing costs, I think Andy has done a great job in that. Quarter-on-quarter, I see that the financing cost has come down a bit. Should we say that the level has stabilized around below 4.5% going forward, even if there is going to be no cuts for this year, let's say?
Probably not. The reason why there's a drop in this quarter was because of the Fed cuts that took a substantial impact on Q4. That was slightly offset by the higher loan margins for the two loans that we refinance or early refinance in the same quarter as well. Also bear in mind that, last two quarters, we have already said that sometime this year we have about $100 million of interest rate swaps that will be expiring, mainly in Q3 of this year. When that swap rolls off, we will make a decision on whether to do a new swap or let it stay on floating first, but that will probably have an impact this year as well as next year.
Of course, for the new loans that are due to expire this year, next year, the loan margin now is about 30 to 50 basis points higher than the original loans. You may have to factor that in as well. Probably I would say that the cost of debt will continue to increase, this year and next year, before it stabilize probably mid-year onwards.
Any guidance you can give for this year?
Probably not. We don't give guidance on the interest cost.
No worries. I know. Thank you.
I can't predict how many cuts are there this year as well.
I understand. We face the same challenge. It's okay. Yeah. Thanks a lot. That's all I have.
Thanks, Vijay.
Thanks, Vijay. I think we go back to John, who's raised your hand again.
Yeah. Morning. Follow-up questions also relating to cost of debt. For the refinance loan of $20 million and $40 million, could you share with us the all-in cost of debt for that two refinancing?
The loan margin for those debts is, I would say probably an average of 1.6%-1.7%, and then you just add on the floating rate to those debt, and that should be your all-in cost of debt.
Okay. Thank you. Earlier, mentioned, for rental reversion for 4Q 2024, it's positive rental reversion of 1.7%. Did I hear correctly that's contributed by Maitland and, 125?
Yeah. Those would be the two big drivers of the positive rental reversion. We had some negative rental reversion as I mentioned at Plaza and Westmoor that partially offset that, but that's where we had it.
Okay. Thank you. Thank you, David, and Andy, thank you.
Thanks, John.
Thanks, John. Derek, you have a question.
Yes. Thanks, Lilian. Hi, Dave. I'm back. I just got just two more questions that I have.
Just two more? You promise just two more, that's it?
Just two, they are packed in those two.
Oh, there we go. Two 12-part questions. I got you.
Sorry. My first part is, if you can just come back to me on TIs on a per square foot. Why is it at this point in time, could you give us a range on what you need to pay for, let's say, renewals and new leases for a portfolio?
Yeah. For TIs, it's a big range within the portfolio. On a per year of the lease basis, on average, we run maybe $11, but it ranges anywhere from $7 per foot per year to about $16. Per foot per year, up at Plaza Buildings, where it's the most expensive place for us to build. On a renewal, it's typically more like $5 per foot per year, and there's a lot less variance there, maybe $3- $8 for the portfolio.
Yeah.
That's up a bit over the last couple of years just from inflation, not from us doing anything different to try to bring tenants in by overspending or some of the other things that folks do when they've got a struggling portfolio. We've maintained occupancy is strong, so we haven't resorted to any of those sorts of things. We're just doing, for us, normal build-outs for tenants, and we're building nice spec suites, and it all looks nice, but we are not trying to buy tenants with it, if that makes sense.
Got it. Okay. That's very helpful. Thanks for that. Yeah, my next question is on the ability to start paying distributions. We understand 2025 is where we're you still be holding our distributions, but what are the data points should we track for you to be able to restart? Is it 2026 you clear your banks, you can start already, or/and what are the data points we should take note of for you to be able to pay earlier?
Yeah, we're still on track for 2026. We haven't seen anything change yet that would tell us something different. That's either good or bad.
Yeah
That still seems to be fine. Our portfolio's performing where we would expect it to or maybe a little bit better. Our leasing was very strong again in Q4. Interest rates are sort of where they're at. We refinanced the loans that we needed to through first quarter of 2025.
Yeah.
We've got loans coming due later in 2025, and some of 2024's got pushed. Our expectation is we will get those extended or, even better, maybe sign some new loan agreements that have back to normal sorts of terms of four or five years, that sort of thing, for most of those. We had expected going in to all of this back at the beginning of 2024, that the markets would start to open back up again for things like that towards the end of 2025. We still hold that view. We think our performance is also a real positive, there's no guarantees on some of that. In terms of getting things to happen in 2026 as planned, I think we can say we're confident in the fact that we will be able to restart distributions in 2026 as expected.
For it to move forward, some interesting things would probably need to happen. We'd need to see some, I think, big changes in terms of interest rates. That would be one thing. If we saw changes in interest rates, that might make that possible, because that would lead to lower interest expense giving us more ability to pay distributions.
Yeah.
For funds, it would also be an indicator, I think, that banks are coming back into lending. Another thing would be the ability to significantly rebuy the portfolio and have more capital available to us to fund these sorts of things, the tenant improvements and the capital expenditures. If we were able to significantly early refinance all those long-term, essentially into long-term permanent loans, and have additional capital available via RCFs.
Yes
That's something that could potentially enable us to restart a distribution a little bit earlier. If somehow we were able to figure out that we'd have a significant increase in valuation this year, I don't think that I'm saying that's likely or even much of a possibility. I don't think it is. If you're asking, if we got three-quarters of the way through the year and talked to a bunch of appraisers, and everybody thought our valuation was going up significantly, which would significantly reduce our leverage level, that would be something that could give us the ability to restart a distribution a little bit sooner. I think that's the least likely of the things I've talked about, none of which are particularly likely to happen this year to cause us to accelerate distributions, if that makes sense.
Got it. To clarify, right? Meaning there's ICR that you just call as gearing, which are the ones that I know everyone's important, but which is, in your view, the biggest lever in your hand that you can speak to the banks and say that, "I'm looking good, and I'm paying distributions." Because you've got peers that ICR lower than you and paying distributions. I just want to get a good sense what's stopping you.
I think it's multiple reasons. Of course, I think for the banks, leverage is a key concern.
Okay.
The performance of the portfolio is definitely a key concern by them as well because they are now looking at the cash flow of the portfolio as well when assessing whether to extend the loan. I would say both the operational results as well as the fact that hopefully we can keep our leverage as low as possible.
Okay.
You said with others that have leverage lower than us that are paying distributions. Did you mean higher leverage than we have and are still paying?
That's the word.
Lower ICR. Okay. Yeah. Besides the point. Okay.
A particular peer, they more or less adjust their whole portfolio with the refinancing, right?
Yeah.
I mean, politically, it's not so much the banks. That would just give us some freedom, but we care about our leverage level.
Right.
Increasing leverage in order to pay distributions, if it's very significant at all, wouldn't be a great idea. Really the biggest lever that we have is operations, which is what could potentially lead to an increase in value for next year, which would lower leverage and give us more ability, if that makes sense. If we saw that coming, if we were able to knock the cover off the ball.
Right
As we would say, for leasing for this year. If we had another 19% leasing year, if we lease three floors at Plaza and both the big spaces we're getting back at Westmoor.
Okay
We're in a position to know valuations are going up now, and we're in a position to restart distributions a bit earlier. I think that's the one that I think is controllable by us that, well, somewhat controllable by us, mostly controllable by tenants in the marketplace, but you know what I mean, where we could see something really happen. The banks are necessary and that we want to know we could have the ability to have that financing taken care of and have the RCFs. If those things happen, the banks would jump in line to, I think, provide money.
Got it. Sorry, just one more, and this is also from Rachel. Are you looking to still recycle your assets, i.e., looking to sell in this time, or you are done?
No. I think we've still got a couple of assets that once the market opens up for transactions, once there's lenders in the marketplace, and we really haven't seen that yet. It seems like, it's sounding like, at least in the U.S., that there are some other players. Whether those are firms that are kind of coming together and saying that what they want to do is form companies to raise capital to make real estate loans or that's insurance companies. It's not banks yet. There seems to be some talk in the market that there may be some financing that will become available for office real estate in the U.S. during 2025, maybe towards the end of it.
If the banks were to come back in and make it so you could have real bidding processes because you could have multiple folks looking who knew they could get financing, then we would sell. We think that's going to be 2026. We think that trend will start towards the end of 2025. We've got, as we've talked about before, 1800 West Loop, we've got Sacramento, both of which are buildings where if we get to a market that exists for sale and there's lenders out there and buyers, we would potentially take both of those buildings to market and seek to recycle that capital to, one, lower leverage, two, reinvest in existing assets, and/or, three, potentially recycle some of that into different assets as well.
Got it. That's all from me. Thank you very much. Yeah.
Thanks, Derek.
Might be out of time. Vijay and Jonathan, you've still got your hands up.
Vijay, you have one last question? I think we're good. We're done for the session. I think we've addressed most of the questions, including the ones that were on the public webcast. If we have not managed to address your questions during this session, please feel free to approach us or get in touch with us. Thank you for joining us, and have a good day ahead. Thank you.
Thanks, everybody.