Keppel REIT announced their 2015 full year results. The interest here is that with the correction in price, it pays to view the data provided by the companies to assess the state of the industry.
For office in particular, with the supply coming online soon, most analyst do not favor the outlook for office rentals. And from the list of REITs that I find interesting recently, office REITs is an omission.
Nevertheless, it is always important to say you are wrong if the data says otherwise.
The overall narrative that I get from the slides and the report is that the management is assuring the rentals are secured on a long term basis and they are actively working to retained current customers.
After reading years of presentation slides, you sometimes have a strange feeling when the communication message feels very different and in this instance what stood out was their narrative of proactive engaging tenants and will likely renew tenants for 2017.
This slide is suppose to show some positive light in that, despite the supply coming on line this year, the rent reversion averages 13% for office leases.
Yet in a particular analyst report which I could not remember, rent reversion is not as high recently.
It is rather astounding if under this kind of supply condition that they can achieve nearly a 4%/year revision.
Bar CapitaCommercial REIT, most office REIT tend to have a characteristic of low CAP rates and high gearing.
In this slide, Keppel REIT explicitly want to highlight the reduction in gearing. Their recent sale of assets seem to point to the deleveraging as well.
Here is the income statement of Keppel REIT. A business usually pays out dividends lower than what they make in income. REITs can pay higher due to their tax advantage.
However we do know that Keppel usually requires at least $200 mil to pay their annual dividend.
When you look at the net income before any change in value of assets (refrain from taking final net income as REITs record revaluation of assets in their income, which really isn’t cash flow that they can pay to you as an investor looking for their dividends) the figures look like 70-75% of that amount.
Usually the cash flow statement of the company will allow you to see where the cash flow goes to.The 2 columns to the right shows the full year cash flows.
It is a mess to look at.
The net cash flows from operating activities is almost half of the $203 mil Keppel REIT pays out to unit holders.
What makes up for that is rental support, interest received, not to mention distribution income from joint ventures and associates.
Keppel REIT have a few joint venture where they hold less than 51% interest in, which is why the cash flow statement look like a mess.
One area where Keppel REIT does in the last few years is to buy these assets that are not yet matured from its parent Keppel and gave them rental support. This is a form of financial engineering to me.
In this case the amount of $27 mil is 10% of distribution, which is smaller than what I anticipate.
What is appealing about Keppel REIT is the quality of its portfolio of prime properties but also its long weighted annual lease expiry (WALE) of 6 years.
If I like IREIT and Croesus for their long WALE, then I must have overlooked Keppel REIT.
This is a plus point.
They even have one Australian property leased to Australian Government for 25 years with the option for 25 year extension.
Compared to IREIT, Keppel REIT has the advantage that the expiry is staggered versus how IREIT’s tenants tend to be signed close together.
Share price of Keppel REIT have drifted down over the 1 year. Current Share Price is $0.88.
The revalued NAV is $1.42, representing a sizable discount.
If we look at the historical Price to Book value and dividend per unit yield history, the price to book now is approaching -1 standard deviation of the average. Dividend yield however have not reach similar levels which will bear investors 9.4%.
Current dividend yield is around 7.6% on my Dividend Stock Tracker, where you can see how it competes against other Singapore High Yield Stocks.
When it comes to historical performance, we look at the internal rate of return (IRR) which shows that factor in the duration of time an IPO investor invests in Keppel REIT, with all the money he or she adds during various rights issues and the dividends paid out, how well the investors money perform per annum.
In this case its almost 10 years since IPO and the XIRR is 5.11%. This more or less means if you compare a HDB flat’s annual appreciation, or another REIT’s or dividend stocks XIRR over the same similar period, or a bank’s fixed deposit, which gives a higher return.
The price fall in Keppel REIT shows opportunity, and that the assets look quality and sheltered with long WALE. The dividend yield looks attractive, but the thing about Keppel REIT that stops me from looking at it as a long term play and more speculative is that, for a portfolio with this quality of assets they should have done better.
Over the years, the actions of both Keppel and Keppel REIT shows that Keppel REIT looks more like a vehicle for Keppel to liquidate their assets to get cash to be recycled, rather than the idea of a trust, which is to grow it through various means aligned more to shareholder interests.
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Monday 24th of October 2016
Just wondering where you get the DPU history that you showed above?
Thanks for the help.
Wednesday 26th of October 2016
I got it from SGX > Corporate Actions
Friday 22nd of January 2016
very ncie written comprehensive article.
can i ask what do u mean by "buy these assets that are not yet matured from its parent Keppel and gave them rental support."
Friday 22nd of January 2016
hi h, some of these sponsors sell these assets to REITs when their asset yield is 2%. it is not accretive. so the sponsors offer to top up the other 4%, before the occupancy and growth makes up the other 4%.
this is a form of financial engineering, nothing wrong with that, but what if it doesnt grow to that extend?
Friday 22nd of January 2016
Great analysis on Keppel REIT. In my opinion, the reit will need about 210 Mil to support its 6.7 cents dividend based on 3.216 bil shares. Assume Keppel REIT's cashflow is the same as this year's (despite the lack of rental suppport and loss of income from 77 King Street), the reit will generate about 250 Mil in cash from investing and operations; with interest expense likely to be 55 mil (decreased due to lower loans) and perpetual securities distribution of 7.5 Mil, 210 mil is not a sustainable number. A more conservative number will be 190 Mil. So expect about a 10 per cent decrease in dividends.