Good morning and welcome to KORE US REIT's first half 2024 financial results webcast. My name is Brenda, 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 off the webcast with an overview of KORE's financial and operational performance for the first half of 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. Without further ado, I will now hand the time over to the CEO, Mr. David Snyder.
Thank you, Brenda. Good morning, everyone, thank you for joining us today. Let's go ahead and start on slide four. KORE announced its recapitalization plan on February 15th because KORE's leverage had risen due to the 2023 year-end valuations, resulting in lenders becoming even more concerned about KORE and the overall U.S. office market. As such, we took the proactive measure to suspend distributions beginning with the second half 2023 distributions with the expectation that distributions will be suspended through the second half 2025 distribution that would otherwise be paid in the first half of 2026. 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.
The recapitalization plan does not anticipate KORE selling any buildings at significant discounts to their valuations, nor does it anticipate KORE selling any properties during 2024 or 2025, given current market and lending conditions. If conditions change, we would pursue asset sales sooner. As part of the recapitalization plan, KORE will attempt to refinance the loans that are due in 2024 and 2025 prior to maturity. Meanwhile, KORE will continue to invest in the portfolio with the goal of maximizing NPI and maintaining occupancy throughout the recapitalization period and restarting distributions for 2026 at the highest appropriate level, balancing the capital needs of the REIT and the desire to distribute income to unit holders. Moving on to KORE's first half 2024 key highlights on slide five.
We leased more than 534,000 square feet of space in the first half of 2024, equivalent to 11.1% of the portfolio NLA. The majority of the leases signed were in Seattle, Bellevue, Redmond, Denver, and Orlando. Portfolio committed occupancy inched up to 90.7% at June 30th, 2024, an increase from last quarter and December 2023. Income available for distribution was down 8.8% year-on-year, mainly due to higher financing costs, while net property income was down 4.2% year-on-year. Cash NPI was only 1.6% lower year-on-year, mainly due to lower recoveries in car park income. The interest coverage ratio was 2.9 x, and KORE's aggregate leverage has decreased slightly to 42.7% at June 30th, 2023.
On July 19th and July 29th, KORE early refinanced or extended $170 million of its loan facilities that were originally due in the fourth quarter of 2024 and the third quarter of 2025. I will now hand it over to Andy to elaborate on KORE's financial performance.
Thanks, Dave, and good morning, everyone. On slide seven, you can see the summary of KORE's financial performance for the second quarter and the first half of 2024. As Dave had mentioned, income available for distribution had reduced by about 8.8% year-on-year, and that's due mainly to the higher financing cost. Adjusted NPI or in essence, cash NPI, was down 1.6% year-on-year, and that's mainly due to lower recoveries of our property expenses as well as lower car park income. For the low car park income reason being that last year we had a lot of short-term or transient parking at our plaza building in Seattle because of nearby construction, which is nearing completion this year. Pursuant to the recapitalization plan, no distribution will be declared for the first half of 2024.
Next, slide eight is the snapshot of our balance sheet as at June 30th and December 31st, 2023 for comparison. As at the end of June, our NAV per unit improved to about $0.71 per unit, and that's mainly due to the withholding of the distribution. Next will be slide nine. Our financial position or capital measurement slide. You can see that aggregate leverage has fallen slightly to 42.7%, again, due to the withholding of the distribution. Interest coverage was 2.9 x. All-in average cost of debt was 4.47% per annum. This includes the amortization of the upfront debt cost. Excluding debt, effective interest rate is about 4.36% per annum. Hedging wise, we have about 69% of our variable rate loans hedged to fixed using IRS.
Of course, you know that last week MAS has published a consultation paper relating to the proposed amendment to the leverage requirement for S-REITs. This includes proposing a single-tier minimum ICR of 1.5 x, and the aggregate leverage is capped at 50%, which in essence will provide some form of relief for our S-REIT that is on the back of the higher financing costs. Next slide. As you all may be aware, over last week and earlier this week, we have made a couple of announcements on new facilities or loan extension that we have obtained from our banks. Those loans or extension will be used to refinance part of our existing loans or extend further.
You can see that on a pro forma basis, the chart on the bottom right is showing the pro forma of the debt maturity, assuming the refinancing and the extension are effective as at June 30. You can see that the loan that will be due in August next year, $115 million, we obtain an option to extend it by one year. The exercise of the option is at our sole discretion. Once we exercise that one-year extension, that $150 million will be moved to 2026. That is the biggest chunk of our loan due in the next two years. For the loans that is due in Q4 of this year, one loan, $30 million, we obtain a three-year extend. We refinance it for a three-year on a three-year new loan. You can see that it will be the green tranche in 2027.
For the $45 million that is also due in quarter four of this year, we had a new loan of $25 million to extend that further to November next year. The remaining $20 million, we are currently in discussion with other banks to get new loans to cover that $20 million as well, we have other options on the table as well, potentially. That leaves us with the $40 million loan that will be due in February next year. We will start talking, or the bank was not ready to start talking about refinancing that in Q1 and Q2 this year. We will probably start discussion with the bank soon, this one in Q3. Hopefully, we can get that done as soon as possible. If not, we are also in discussion with other banks to potentially look at that as well.
As you can see, we also provide some pro forma numbers on the cost of debt. Assuming all these are done as at January 1 this year, you can see that the effective interest rate, excluding the amortization, will increase by about three basis points per annum. All-in cost of debt, including amortization, will increase to about 4.56%. The reason being that once we refinance the loan, the remaining unamortized upfront debt cost for this loan have to be taken to the P&L immediately, which is why you can see that the effective interest rate increase that are lower than the all interest rate. With that, the new weighted average term to maturity will be 2.6 years. Hopefully, I have addressed most of the question that you may have later on on the refinancing of the loan. Feel free to ask later on.
With that, I'll pass back to Dave on the ops.
Thanks, Andy. Slide 12 highlights some of the reasons why we invest in the key growth markets we do and not in gateway cities. These key growth markets have grown to be more attractive to companies and individuals because of their low income tax rates, lower cost of living, better employment opportunities, and more attractive lifestyles, among other factors. All but one of our markets are in the top 20 markets to watch in 2024. Moving to slide 13, you can see changes in committed occupancy by property. This quarter, KORE's committed occupancy improved to 90.7% as the majority of properties saw an increase in occupancy rates. On slide 14, the line graph shows KORE's historical occupancy against the U.S. average as well as the gateway cities. Over the years, KORE's occupancy rate has remained well above the U.S. average and gateway cities, with the spread actually widening over time.
Our two peers in Singapore are both currently below both the U.S. average and the gateway city average, and about 10%-12% below KORE's occupancy. Let's move to slide 15. The second quarter of 2024 saw us lease around 199,000 square feet of space or 4.2% of portfolio NLA, bringing the total leased space for the first half of 2024 to 534,000 square feet or 11.1% of the portfolio. On this slide, we have included a new graph that shows KORE's executed leases from IPO through the first half of 2024. You can see here that the leasing momentum has remained relatively stable aside from the drop in 2020 due to the COVID-19 pandemic. New expansion leases represented 36% of the space leased during the first half of the year.
While we do still see leasing momentum in certain markets, it is unlikely we will sign the same volume of leases in each of the remaining quarters of 2024, and we have a lot of known vacates coming up this year, with a large proportion occurring in the latter part of the year. However, we would hope to lease similar volumes of new and expansion space in subsequent quarters. Our built-in average annual rental escalation of 2.6% continues to provide growth for KORE. The rental reversion for the first half was negative 0.3%, due mainly to renewals at Bellevue Tech Center, Maitland, and Westmoor Center. Rental reversion for the second quarter was a positive 1.2%. Slide 16 highlights KORE's geographic and industry diversification. At approximately 67% of NPI, our tech hubs of Bellevue, Redmond, Austin, and Denver continue to drive our portfolio performance.
With approximately 51% of our tenants by NLA coming from the sectors of TAMI and medical and healthcare, our industry-focused diversification continues to set us apart from our peers. On slide 18, 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.
Oh, 17. Yeah, you skipped one.
Looks like I skipped a slide and didn't turn the page properly here. Let's turn to slide 17, where we highlight our low tenant concentration risk first. This key differentiator is driven by the fact that we have over 380 distinct tenants, with no tenant exceeding 3.8% of portfolio CRI. The total contribution from our top 10 tenants is also quite low in comparison to our peer set at just 28.2% of CRI. 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. Moving to slide 18, 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 the gateway cities.
The average of our key growth markets continues to outperform the gateway cities, though the U.S. average is slightly ahead, largely due to the Seattle Bellevue Redmond market, where CoStar showed negative rent growth in excess of what we're generally seeing at our properties in the region. If we normalize the Bellevue and Redmond rent growth, our key growth market would have rent growth of about 1.1% on average, in excess of the U.S. Similarly, on slide 19, you'll see a chart that shows rent growth projections for the next 12 months. The projected rent outlook for the U.S. gateway cities and KORE's key growth markets are projected to be largely negative. You will see on the next slide that the projections are not in line with historical outcomes.
If we normalize Bellevue, Redmond to what we are seeing, which is flat rents, our key growth markets would be -0.5%, which is better than the U.S. average. Slide 20 shows the comparison of the forecasted 12-month rental growth for our markets over several years in green, versus the actual average growth of KORE's key growth markets during those actual time frames in blue. The key takeaway here is KORE's portfolio rent growth has remained relatively flat, even as projections from CoStar have fluctuated quite significantly. Let's move on to the market outlook on slide 22. This slide highlights several U.S. economic fundamentals. U.S. economy is slowing but continues to remain resilient. The Fed paused rate hikes for the seventh consecutive FOMC meeting in June as the U.S. labor market remained tight.
Annual U.S. inflation fell for a third straight month to 3.0%, the lowest since June 2023. The Fed hinted that the U.S. central bank is closer to cutting interest rates with the first rate cut expected by some in September, though it may not start until after the elections in the U.S. On slide 23, we highlight some information on back to office trends in the U.S. Physical occupancy rates in San Francisco and L.A. are still below 50%, while Manhattan return-to-office rates have improved. Regulatory changes make it trickier for Wall Street to allow working from home. Banks are now following suit.
Citigroup and HSBC were the two banks known to be among Wall Street's most flexible in allowing employees to continue working remotely after the COVID-19 pandemic. They are now requiring some employees to be in the office five days a week. The changes come as the Financial Industry Regulatory Authority, FINRA, the U.S. brokerage industry's main watchdog, is set to adjust rules for monitoring workplaces in the coming weeks. Office using job growth was strongest in Sun Belt markets. In keeping with our goal of highlighting new and advent different advantages and benefits of our investment model, which includes key growth markets, a mix of suburban and CBD assets, depending on markets, and a focus on TAMI and healthcare tenants, slide 24 shows that CBD office occupancy rates have decreased over the years, falling below the suburban office occupancy, while KORE continues to outperform both.
Downtown office properties, once crowned as being trophy assets, are in some cases now seen as being nearly toxic, though in certain markets, the CBD is still the strongest location. There are still tenants who wish to be downtown. Many are shrinking their real estate footprints aggressively once their leases come due. Moving on to slide 25, you will see leasing activity in the U.S. by sector. The TAMI sector led despite pullback from large tech firms. This reinforces KORE's investment thesis, focusing on the fast-growing TAMI, medical and healthcare sectors across key growth markets in the U.S. Similarly, the bulk of our new leases signed in the first half of 2024 were mainly from TAMI tenants.
On slide 26, we close off the main portion of the presentation with a summary 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 built-in average rental escalations for further organic growth. Finally, very importantly, we move to slide 27. We hope unitholders will understand that while distributions to unitholders are slated to be suspended until the end of 2025, beginning of 2026, 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 retained.
The manager would like to strongly urge all unitholders to continue to submit the relevant tax forms to reduce KORE's withholding tax burden. Thank you all for your time and attention. With that, I'll turn it back over to Brenda.
Thanks, Dave. With that, we will begin the question and answer session. Analysts with questions, please click on the raise hand function. We will queue you to unmute yourself to ask your questions. First, we have Vijay. Vijay, you can go ahead and ask your question.
Hey, Vijay. Good morning.
Hey. Hi. Morning, Dave and Andy. First of all, congrats. I think a commendable set of results considering the market conditions, both in terms of operational front and refinancing front. With the conditions now looking slightly better, I mean, your refinancing has been relatively taken care of. Operational-wise, things seem to be looking better. How should an investor look at from a potential distribution point of view? Would it still be second half of 2025? What should be the factors that could change your mind to make your distribution start early?
Yeah, thanks, Vijay. Nothing has changed at this point with our timing, and that's because nothing has changed in the sales market, if you will, in the U.S. for real estate. What we need to see to be able to make changes would be banks coming back to the lending market and lending against U.S. office. As of today, that is still not happening in the U.S. We're starting to see some sales transactions take place. Those are almost exclusively from CMBS workouts or bank loans that have been foreclosed, or where keys have been handed back to banks, and the banks are trying to move them. Again, even there, that's almost exclusively very small transaction sizes. Smaller than anything we would probably like to sell because there's no financing for those particular buyers.
Once we see that market change and we can obtain financing more easily, and we would be able to sell to buyers who could obtain financing more easily, we'll sell one or two of the buildings that we've had in a position that we'd like to sell for the last couple of years and been talking about. Then we would move back into being able to make distributions again, because that would allow us to right-size the balance sheet. Really, it all comes down to getting the balance sheet right-sized, getting leverage a little bit lower than we've got it now. We've really liked the direction MAS is planning to go. That simplifies things, but it doesn't really take the pressure off of a 50% leverage limit.
It still makes lenders cautious about anything that approaches 45%, but having flexibility in terms of the coverage ratio is a good thing. Nothing's really changed for us. It all really depends on that U.S. side of the market. I think seeing banks now having properties, some of them actually marketing some, seeing a few more people handing keys back to banks and seeing some of the CMBS starting to get worked out gives me hope that that will be happening as we get into 2025. It's what we saw out of the financial crisis, was when that started happening, when the CMBS market really started to solve the problem by bringing things to market. Banks followed. Not long after, we started to see financing available to the industry again, and that's what's going to bring everybody out, I think.
That's what's going to make it possible for us to get started on distributions again.
Got it. Thanks. That's a lot clearer. Just a few follow-up on this. I just want to know what the bank covenants are at this point of time, and even after MAS changes, you don't plan to be comfortable going up above 45%. Would that be right?
Hi, Vijay. I think in terms of the bank covenant, it's the same for the new loans as the rest of our portfolio loans as well. ICR of 1.5x as well as leverage of 50%. That is consistent in terms of the new loans that we are taking. In terms of whether are we comfortable going above 45%, until the banks are comfortable with us going above 45%, we would as much as possible try to avoid crossing over that so-called hidden or dotted line in terms of the threshold that most market players are setting below the 50% MAS limit.
I think, Vijay, at some point, we'll see the banks even, Singapore lenders that are more what we use. The U.S. financing is mostly for individual transactions, secured debt, that sort of thing. That's not back. There are lenders here in Singapore that are continuing to lend or at least roll forward loans and potentially making new loans, which we would be trying to take advantage of, as Andy already talked about a little bit briefly. Once we get to the point where we're able to obtain some new credit facilities that give us some flexibility, we might be willing to temporarily go above 45% a little bit if we've got plans that have us, say, marketing buildings and that sort of things for sale. If we're comfortable, we will get them sold.
We might temporarily go over 45, but not until we've got credit available that gives us the flexibility to do that.
Got it. Thanks. Sorry for harping again on the distribution point. I just want to consider what is your valuation outlook, if the valuation is minimally lost or in a net profit position Technically speaking, with loans refinancing, you wouldn't be able to withhold your distribution for the year. Is that right?
Right. At the end of the day, that's an assessment we still need to make as at the year-end. Probably because we have already announced the recapitalization plan, and most of the banks gave us the refinancing on new loans on the expectation that we keep our leverage at a reasonably lower than 45% position. Also, we need to see what is our capital needs for next year and We'll do a budget in terms of where our rental income will be like towards the end of the year as well. Then we will do a holistic and oversight in terms of looking at our cash flow for 12 months- 15 months after the end of 2024 to see where we are in terms of operational working capital needs.
Vijay, there's really two prongs that we're relying on under the MAS rules, if you will, in terms of withholding distributions and not making them right now. You're familiar with the one, which is why you're asking the question, if you're not in a loss position, don't you need to distribute? There is another prong that we also are relying on, which is what we would continue to rely on to not make the distributions, strengthen the company, strengthen the property, strengthen the balance sheet, then, go ahead and restart distributions under the timeframe that we're talking about. No, there's not a must for us to restart distributions just because we hopefully will have a valuation that comes in either quite close to where we are
a valuation that actually gives credit to and accounts for the money that we're investing into the properties as well, or a slight loss. In any of those situations, we would still anticipate withholding distributions in 2025 while we continue to rebalance.
Got it. If the bottom line is that we should see some divestments before we can consider some sort of distributions back at this point of time, and that's your thinking at this point of time, right?
Yeah. We've got to be really prudent for the unitholders and the portfolio. Again, the other thing that would provide us the ability to restart distributions could be flexibility with banks coming back and providing loans. At which point we could say, "Great. We can go ahead and make our distributions." We'll use those loans to cover the capital needs in the portfolio, which we believe will continue to drive up certainly by 2025 with the rate-cutting environment that we expect to see. We expect to see increasing valuations, and that would help keep us flat and give us a comfort level.
Right now, we don't see it really in the cards in the near term that we're going to have either the ability to sell buildings or the ability to have those sorts of credit facilities from banks that will enable us to do all of that. For now, we just proceed with the plan that we announced and hope that things change, and we can do things a little bit faster or differently than we had originally planned. We're on track with the plan now. A lot of the refinancings have already happened. Operationally, I feel like, with the leasing that we've done, we're probably ahead of plan on that as well. We feel as good as we really can at this point about fulfilling the things that we told unitholders we were going to focus on.
Got it. Certainly, yes. I think another way is congrats on the early refinancing. Maybe can you give some more color in terms of, the overall rate change looks very minimal. Can you give some color in terms of what is the new refinancing for? Is this going to be fixed or floating, and what kind of margins is the banks commanding now?
I think, in terms of the reason why the impact on the portfolio all in is not so much is because it's really about $55 million worth of loans that has been refinanced. The change in the loan margin, I would say, on average is about 30 basis points, 40 basis points. We are looking at about just a loan margin alone of about, I would say, 1.7%-2% + SOFR for new variable rate loans nowadays. Of course, we managed to get better than expected rates for the couple of refinancing that we did. For the extension of the $115 million, that is at the same rate of the original loan. That is part of the refinancing. That is more of an extension of the existing loan by a further year from August 2025.
That particular loan is at the same rate that it currently is. If you to go for a new loan now, right, you, I think, expect somewhere between 1.7%-2% loan margin + SOFR.
Okay. Sounds good. That's all I have. Maybe I'll go at the end of the queue and later address us. Thank you.
All right.
Thanks, Vijay.
Next, we have Derek. Derek, you may unmute yourself and ask your question.
Good morning, Derek.
Hey, morning. Can you hear me?
We can.
Okay. Thanks, Dave. Congrats on the refinancing, I am happy to say that I am wrong. We want to move on. Maybe can I come back? I think Vijay asked a lot on the refinancing, I want to get more color if you can.
Yes.
Do you reckon that the banks are happy to refi again after this round? I know it's very initial, Is it something that the conversation, the banks is like, "We are happy to help you once, in the next round of refinancing, you have to reduce our exposure." Is that going to be that hurdle in the medium term?
I think it's a mixture. There will be banks that will want to reduce their exposure, I think a lot of the banks now are actually waiting to see whether the U.S. market condition is at the bottom, is it turning around.
Right.
I think if it starts to turn around, as Dave has said, U.S. banks start to lend again for transaction-
Yeah
I would expect the Asian bank to follow suit in terms of being more comfortable to lend for either refinancing or even for fresh loans.
Andy can correct me if I'm wrong, from my discussions with banks and our internal folks helping us with the lending, our main banks have not expressed that they want to get out after these current ones. We have some small financings here or there, where we may have a lender or two that might be considering that. I think, as Andy said, most of those are really waiting to see what happens. Our main lending relationships have not expressed anything along those lines.
Yeah. Correct.
Okay. Got it. I'm also fairly amazed at the all-in cost of debt. It's at a level which I think shows the strength of the Keppel group name, right? Could you just understand on a like-for-like basis, I understand that you have to pay off your all-in cost at once, but if you look at it, margins, why? Did they expand or compress?
Expanded, definitely. For the two loans that we refinanced, one is $50 million, one is $25 million.
Yeah.
Average expansion of the loan margin, I would say, is about 30 basis points-40 basis points.
Okay.
Yeah. If sentiments turns better, I would expect the loan margin to be lower. At the moment, I think we probably work on the more conservative side in terms of expecting at least a new loan margin of 1.7%-2% + SOFR for new loans to be taken.
Okay.
Which is also, Derek, one of the reasons why we're pretty comfortable with some of these shorter extensions of some of these loans.
Yeah
In a year or two, when some of these are actually going to come due and we'll be doing real refinancings.
Yeah
We would hope to see better rates.
Yeah. That's the reason why we only did a one-year extension for the 115 million units here. You can see that originally our 2026 tranche is very minimal.
Yeah.
We do not want to laden a particular year, like 2027 or 2028, with a huge refinancing requirement as well.
That is a bit of a strategic move on our side as well to try to layer up.
Okay.
Rather even up the majority as much as possible.
Got it. Okay. I'm just wondering, right, you mentioned that the banks are willing to lend in the assumption that your gearing remains sub 45%. Is there a concerted effort or, let's say, a lever that the banks want you to, let's say, bring it down to 35% by, say, end of 2025?
No.
Is there something like that? No.
After this round of result, you can see a lot of the S-REITs are going to have trouble with leverage, right?
I think approaching 35% is not going to last anymore.
Not in the picture.
Yeah.
Not in the picture.
Yeah. Correct.
No, i.e., what it means is that they are not telling you to sell assets and emerge out of this two-year dividend moratorium.
No
With lower gearing. There's no such?
No such, yeah.
Okay.
I think in the long run, the banks and the industry have to accept that 35% is not a viable leverage percentage going forward. I think they should look at it as in high 30s or low 40s as maybe the norm.
The new normal, yeah.
Yeah.
I think, Derek, as the REIT industry matures here in Singapore-
Yep
it's going to continue to catch up to the U.S. in a lot of ways, one of those is leverage. If you look at U.S. REITs, the standard for decades has been 40%, you'll see them-
Yeah
-go a little above and a little below periodically.
Yeah.
40% is the right number. 35% never was. Hopefully, what we're seeing here is Singapore banks getting more comfortable with what's a more normal leverage level. Not risky at all. If you're talking about 60%, now we're talking about places that I don't think anybody should get to. On the U.S. side, that 40% seems right. I think banks are getting a lot more comfortable with that here in Singapore as well, which I think is good for everybody. Good for the industry and good for the banks, too.
Okay. Got it. Okay. Sorry, if I could just move on to my next question, is on your CapEx. I noticed that you spent about $30 million, Dave, I remembered, I think probably six months ago, you mentioned that you are keeping distributions. I think part of the proceeds was to fund your TIs, right? Could you just remind me, where was the $30 million? What was it used for? How much more to go?
Yeah. In terms of what we said we were going to do with the withheld portions, the goal was to use all $60 million, which would've been the 2023 second half distribution, plus both distributions, essentially from 2024 for capital needs at the properties, that'd be a mix of building improvements, spec suites, TIs, leasing commissions, sort of the gamut of what we need to spend money on. Our hope was to spend as much of that as we could on spec suites, because I think those are the best investments that we can make into the portfolio. Because once we build out a spec suite to a certain level, the ongoing capital needs for those spaces go down significantly over time on release.
When we just do a normal TIs and building out for a specific tenant, as you and everybody else are aware, you often have to rip those out or much of it out for the next tenant if your tenant leaves and you've got to find somebody else. The majority of leasing for any space over about 5,000 sq ft is going to be normal TIs and that sort of thing, and that's just sort of the reality. We've been spending a mix of all of those things in the property, but we have done a good amount of spec suites during this year and have some more that are still slated or actually underway right now that are improving the portfolio as we go, if you will.
We've actually had higher leasing than expected on things where we've needed to do TIs, meaning unplanned, unbudgeted leasing during these first two quarters. We had a plan coming into the year on where we were going to lease space, what we had already built out, what we were building out, where we leased. We've leased most of that. We've also leased more space, and that's why the numbers look as good as they do. We've probably spent a little more on TIs than I would like. Leasing commissions are in the same range, if you will, mostly because whether you're leasing a spec suite or you're leasing out space you're building, you're going to have those. We've cut back a little bit on some of the building improvements.
Those are some things where we've found some ways to push those out a little bit farther than what was in our original budget, we've kept our budget for 2024 exactly the same in terms of total dollars, sitting right at just essentially $60 million.
Okay. Got it. Okay. That's all I have for me for now. All right. Thank you very much for your input. Yeah.
Thank you.
Yeah. Congrats again.
Next we have John. John, you can unmute yourself and ask a question.
Good morning, John.
Yeah. Good morning. Congrats on the early refinancing. I have three short question. I will read them in one go. First question relates to the improvement in occupancy at Westech 360, 125, and Iron Point. I think they are quite significant improvement. Could you give some color in terms of new tenants and industry sector they are from? Secondly, on your top 10 tenant, we see Ball Aerospace dropping off and replaced by BAE Systems. Could you sort of explain what happened there? The third question relates to earlier you mentioned a large vacancy in the second half. Which are the major ones, and which buildings are involved? Thank you.
All right. Thanks, John. I'm not sure I want to answer all your questions because everybody else asked most of their questions to Andy, these are all for me, so it doesn't seem fair. I will go ahead and take a stab at all of these for you. In terms of West ech 125 and Iron Point, what you're seeing is essentially us building out spec suites and leasing them up, plus having relatively strong markets. Westech , we've leased a decent proportion of spec suites as well as some other space.
We've got a couple other spec suites that have recently been completed, we have just done what has been, based on what we're getting feedback from various tenant rep brokers, the most successful marketing campaign they've ever seen in Austin, where we got a bunch of new tenant rep brokers and a bunch that hadn't been to our building, out to the building to look at our new spec suites very recently. Hopefully we'll continue to see positive movement there. At Westech , it was essentially two different companies, mainly it was an insurance company that was the biggest piece of that. Now, if we move at 125, again, we've got some spec suites that are in that. We've got a couple more that we've just completed, we've got a mix of different types of tenants that are in there.
There's a consulting group, there's a healthcare, there's some other things. It's a variety of four new leases that we've picked up at 125. Iron Point is similar. Although at Iron Point, we've got a construction company, investment company, and we've got a big expansion by one of our existing tenants that's a home builder, into one of our spaces. We actually had previously had plans at Iron Point to go ahead and build out a full spec building. At the end of the day, we're not doing that. We're redoing all of the tenant amenities that are in that building, and rather than build it out into spec, we're basically just building out for tenants. Although a couple are building out the way we would've built out a spec, but we've leased most of that space.
It's been really good momentum in all three locations, and if we weren't in the capital crunch that we were in, we'd expand our capital spend for this year. I'm quite confident we would get Westech very close to 90% by the end of this year. We don't have the funds to do it. We'd probably have Iron Point at the same level by next year, but again, don't have the funds to do it at the moment. We're being very careful about capital allocation within the portfolio, make sure we spend it where we get the biggest and best bang for our buck. That really is going to be up at the places where we're having those significant fourth quarter vacates, which is Plaza. We're going to be building out a spec floor at Plaza.
We're getting back most of what's coming back. The known vacates, as I've announced for at least a year, are mostly all at Plaza, with some full floor, larger tenants that we're going to be getting back towards the end of the year, putting pressure on occupancy. Our goal this year has been to make up for that with the rest of the portfolio, and we're ahead of schedule on that, which is good, and we feel good about that. Getting to your second question, I think I've answered the first and the third. The Ball to BAE was an acquisition by BAE. They bought Ball Aerospace. It's just odd that one has initials that sound a heck of a lot like the name of the first one, but that's a different company bought out Ball.
There's no real change to anything in terms of operations at what they're doing at our properties. Really no change there from our perspective at all.
BAE actually will be at two location, Westmoor and also Westech .
No, we don't have BAE at Westech . They are at West Park-
Yeah. Okay
in that portfolio. Yeah.
Yeah.
They're primarily at Westmoor Center in terms of total space being leased, because Westmoor Center is adjacent to Ball's main campus that BAE picked up as part of the acquisition. That's the massive footprint, and then they have a tiny space, I believe, over at West Park.
You mentioned Westech 360 and Iron Point to target to hit 90% by end of this year.
No, that's not what I said. I said specifically we would be able to if we had capital. Because we have banks that aren't really lending and we're stuck to our $60 million budget, we do not have the ability to build out the spaces that we would be able to lease. We would be able to get them to 90% had we the ability to access capital, where banks willing to provide the funds that would help us actually improve their loan security, that's a difficult thing to try to achieve today. No, we won't get there. We have the ability because those markets are very strong right now.
Okay. If I can squeeze in one question on reval by end of the year. I think, last year, the cap rate expansion maybe about 50 basis points. Would the same happen end of this year, maybe cap rate expansion by another 50 basis points?
I'd be surprised. If you look at where treasury rates are now versus where they were at the end of last year, we're not far apart. If the Fed actually starts cutting, I don't see there would be a reason to see any kind of an expansion in cap or discount rates at that point. We're hopeful the Fed's going to make a cut in September. The Fed's got a problem because no matter what they do, if they start cutting this year, it's going to look political. Their choice is either to cut right before the U.S. election or cut the day after the U.S. election, given their two meeting dates. They're going to have to do something that's going to be politically ugly for them. My hope is they choose to do it in September because that's the right thing for the economy in the U.S.
If they do it in September, I'm pretty confident they'll do it again in November. We'll get a couple of cuts in, and that would take all pressure off. Even if they only get one cut in this year, I don't expect to see a big gap out of cap and discount rates. Our operations remain quite strong and at this point, our leasing is stronger than we had even put into the budgets that we gave to the appraisers last year and that we used for ourselves. I think we look at this as that we're in pretty good shape, assuming appraisers don't go crazy on cap and discount rates and being overly conservative with things. We're hopeful to not see a big swing one way or another as we get out to year-end.
We'll know a lot more as we get into third quarter.
I mean, two cuts of totaling 50 basis points is quite possible. If that happens, do you think maybe cap rate will be stable, unchanged?
That's my expectation is an unchanged cap rate regardless of whether they do one or two cuts. I think it would take more than that for them to assume they should use a lower cap rate. If you look at what most appraisers do, they assume a stabilized cap rate. Arguably, there could have been pressure not just for us, but for everything that any appraiser did last year to gap out cap rates and discount rates more than they did. They all looked at the market. They all looked at what they thought was going to happen, assumed there would be rate cuts coming, and they went with what they thought was stabilized.
If we get a couple of cuts, one, zero, or two, as long as the expectation remains that they're going to see some cuts in the future, I think that we will see most appraisers remain flat on cap rates. I think for them to drop it, you'd have to see 100 basis points, and I don't think The Fed's cutting 50 at these two meetings that we're talking about. Our expectation would be flat cap rates. It's all going to be dependent on operators like us and whether or not we can keep our results strong, which we're doing. We hope to see flat, and if things are good, get valuations up hopefully around the amount that we're putting into these properties.
Okay. Thank you for the color. Thank you, Dave. Thank you.
Sure. All right. Thanks, John.
Thanks, John. We have a question on the webcast platform. Congrats on the stable occupancy. Kindly give a flavor on any risks out of 2024 lease expiries and the high expiries upcoming in 2025. How confident is the manager that portfolio occupancy will not dip below, say, 88% through to 31st December 2025?
Okay. At this point, I think we've been giving guidance for year-end occupancy that we expect to be somewhere between 86% and 88%. That's because the expiries at the end of 2024 are known vacates. Basically, what we've got left for this year is known vacates at the Plaza building. There's a couple other small things in there that may stay or go, but majority of that's known vacates. To make up for that would be tough. If we continue to lease at something close to the pace we've been leasing now, we might get to the high end of that range. Yeah, there are some fairly significant expiries coming up in 2025. Maybe if we can get the slide that everybody's seeing to be the one that addresses lease expirations, I'd like to talk about it from there.
If you look at 2025, we've got 16% or 17% of the portfolio that's expiring. That's why I think we're getting the question. People are looking at that going, "That's a lot of lease expiration." If you look at the chart we put in above it, our prior to the pandemic leasing was 17% to +20% . We've been hitting right about 14% to maybe 15% last year, and we're on track to be, I would guess, probably 17%, 18% for 2024, with 11% leased in the first half, and an expectation of probably another 5%, 6%, 7% during the remainder of the year. 17% for 2025 seems reasonable. I think we will see some movement in where we have a little bit of vacancy. I wouldn't say I'm in a position to forecast 2025 end of year occupancy at this point.
A lot of things could change. Things could get better, things could get worse. I would be relatively comfortable saying, essentially the 86% to 88% range I'm giving is one that we would hope to be hitting, not just end of 2024, but also throughout 2025 as well, with the potential to do better than that range if capital becomes available to us, again, because we can get loans from banks or because we're able to sell properties and redeploy some of that capital into the existing portfolio.
The follow-up question is, what portion of the 16% expiries by CRI in 2025 happen in the first quarter and second quarter?
I don't have it in front of me by quarter, a little hard for me to give, I think it looks like about 40% is going to be in the first quarter, with fewer known vacates than we had in the fourth quarter, which is good. I would guess most of that is relatively evenly spread. Most of the time, that is the case with our portfolio. One thing to keep in mind, a lot of the expiries that we see in 2025, the leasing that we expect to do, any renewals that we're really doing in the second half of 2024 are going to be 2025 early expirations. The early part of 2025 expirations are the ones we're working on right now with tenants. Like I said, we're not renewing much of that 5.5%, 6% that's out there for the remainder of 2024.
Those are known vacates. Generally speaking, renewals are going to be the early 2025. We're not particularly worried if that's a little bit higher in first quarter. We're working on those things today. Hopefully that helps give a little color to that answer.
Thanks, Dave. There's another follow-up question. How has the leasing outlook in terms of TIs, free rents changed the last three months, with a special focus on the Bellevue Redmond market? Has the market turned a corner, or is there a risk that things will get worse before they get better?
In terms of TIs over the last three months, we're not seeing any changes at all. On free rent, we're not seeing any changes at all. Most of the Bellevue Redmond market, we're about a half a month per year of the lease of free rent. Some cases it's one month, like the rest of our portfolio. That hasn't changed. TIs, the significant increases we saw over the last few years due to heavy inflation in construction and those sorts of areas, that has fallen off. There's a lot less construction of any sort going on in any market in the U.S. right now. That means we're not seeing build-up in the total cost of what we're spending on TI, so that's remaining flat. Certain aspects of TI build-outs are maybe declining, at least temporarily. Net effective rent is about the same.
We've been pretty flat on our rent in Bellevue and Redmond. In terms of turning a corner, Redmond never got hurt. We've been running that building at 95%. All throughout, rent rates were growing during the pandemic. That's been quite strong. Bellevue has had more pain. In Bellevue, it's got much lower physical occupancy than a lot of other locations where we invest. In terms of turning a quarter, we've got the building across the street from us is nearly complete. They signed Pokémon to be their major tenant. They've got other folks that are looking for tenancy, and that was a big lease. I believe it's about 400,000 square feet. There are some big tenancies that are in the market or have recently signed.
There are some others that are coming in, we've had really good momentum at even Plaza buildings at this point in terms of some potential leases. We signed one lease during this quarter, we've had some pretty strong momentum in some of the smaller spaces we have available there. We've got some potential good news in terms of some of the spaces that'll be expiring at the end of this year. We may have at least one of those that we may keep a tenant in. We may be able to move another tenant into it so we can put a different tenant elsewhere. Turned a corner, I wouldn't say we're there yet, are we seeing things moving in the right direction? Absolutely.
I think we have time for one question. Out of the $30 million CapEx, how much is on spec suites, TIs and free rent?
That's running about 60% on the TIs and LCs, that leaves the rest for building improvements and that sort of thing, spec suites as well in that first number. The majority is in the new leasing, if you will, versus in the things that are just sort of maintaining occupancy. Although I would tell you, some of the building improvements that are in the budget for this year are already underway, are things like redoing those tenant spaces that we've got at Iron Point. Those amenity spaces that we're redoing there are going to help us lease space. It's not all just redoing parking lots and things like that. We've got some strategic things. We've had strategic spend at Bellevue Tech Center as well, where we have finished now our tenant amenity space there, and it is absolutely gorgeous and complete.
The tenants have absolutely really enjoyed that, we think that's going to lead to some future leasing as well as the building adjacent to that is the vacant building on the campus at this point, about 20,000-ish square feet. We feel good about a lot of the base capital that we spent as well. Granted, there's definitely maintenance and other things, some of that is money that's going to lead to leasing, the majority is for leasing, which is good for the portfolio.
John, can we check if you have a follow-up question?
Mm-mm.
I guess not. I guess with that, we have answered all the questions. Thank you for your time today, I guess we can close off the session.
Yeah. Thank you so much everybody for joining. We appreciate your time. We appreciate the good questions about the portfolio. Have a great day.
Thank you