facebookWhat You Should Know About Keppel REIT (SGX: K71U) At Its Share Price of S$1.22



Keppel REIT analysis

What You Should Know About Keppel REIT (SGX: K71U) At Its Share Price of S$1.22

profileSudhan P

At the time of writing, Keppel REIT‘s (SGX: K71U) share price (technically known as unit price for REITs) stands at S$1.22.

Is Keppel REIT an attractive buy at its current unit price and valuation?

Let’s explore using my 10-step guide to pick the best Singapore REITs.

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

Before we dive into analysing Keppel REIT, let’s find out what its business is about. 

Keppel REIT invests in commercial properties in Singapore, Australia, and South Korea.

In Singapore, it owns Ocean Financial Centre (79.9% interest), one-third of Marina Bay Financial Centre Towers 1, 2 and 3 and Marina Bay Link Mall, and One Raffles Quay (one‐third interest). In November 2019, Keppel REIT sold off its stake in Bugis Junction Towers.

In Australia, it has assets in Sydney, Melbourne, Brisbane and Perth.

In all, Keppel REIT’s assets under management stood at S$7.9 billion, as of 31 December 2019.

Source: Keppel REIT earnings presentation

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

Keppel REIT has a financial year that ends on 31 December 2019.

The table below shows how Keppel REIT’s gross revenue (or property income for Keppel REIT) and NPI have changed over the years.

Property income takes income from Bugis Junction Towers, Ocean Financial Centre, 275 George Street, 8 Exhibition Street, and T Tower into consideration.

I’ve also added the historical financial performance of Keppel REIT’s share of results of associates and joint ventures since the REIT has partial interests in some properties. This is just to give a flavour of how those properties have performed as well.

Property income
(S$' 000)
170,347161,252164,516165,858 164,053
Net property income
(S$' 000)
137,465128,370131,200133,155 128,899
Share of results of associates
(S$' 000)
Share of results of joint ventures
(S$' 000)

It can be seen that Keppel REIT’s property income and NPI have declined from FY2015 to FY2019, which is not what we are looking for.

Verdict: Fail

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Together with Keppel REIT’s fall in property income and NPI, its DPU has also been falling from 2015 to 2019, which is not a great sign.

Distribution per unit (Singapore cents)

Verdict: Fail

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

Next up is the property yield check.

For FY2019, Keppel REIT had a property yield of 3.5%, which is below my range of 5% to 9%.

Verdict: Fail 

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 December 2019, Keppel REIT had a gearing ratio (also known as aggregate leverage) of 35.8%, which is below my limit of 40%.

Source: Keppel REIT earnings presentation

The latest gearing ratio improved from 38.9% at end-September 2019 following the repayment of loans from the divestment of Bugis Junction Towers.

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

Keppel REIT’s latest interest coverage, at 3.8x, is too low for my liking.

Source: Keppel REIT earnings presentation

Verdict: Fail

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

Keppel REIT’s portfolio committed occupancy rate was healthy at 99.1%, as of 31 December 2019. The latest rate is an improvement from the previous year’s 98.4%.

Furthermore, the latest rate is above the market’s average occupancy, as seen from the slide below:

Source: Keppel REIT earnings presentation

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

For 2019, the average signing rent for the Singapore office leases was around S$12.42 per square foot per month (psf pm).

In comparison, for the previous year, the average signing rent was around S$11.10 (psf pm).

There has been a positive rental reversion for the Singapore office leases, which make up the bulk of Keppel REIT’s portfolio.

Verdict: Pass

8. Growth Prospects Check

One way that Keppel REIT is using the proceeds from the divestment of Singapore’s Bugis Junction Towers is by buying back its units from the stock market.

When Keppel REIT announced its financial results for its second quarter ended 30 June 2018, it said that it’s looking to initiate a unit buyback programme. In the earnings release then, it mentioned (emphasis mine):

“The Manager also intends to initiate unit buy‐backs pursuant to the mandate obtained at the annual general meeting in April 2018 as part of its proactive capital management strategy. Subject to market conditions and taking into account the restrictions under the Singapore Code on Take‐overs and Mergers, the Manager currently intends to buy back up to approximately 1.5% of issued units over 6 months. In considering the buy‐back of units, the Manager will only purchase units when it is accretive to distribution and net asset value per unit, while maintaining the REIT’s financial capability for strategic opportunities. In view of the planned buy‐backs, the Distribution Reinvestment Plan (DRP) will be suspended.”

It remains to be seen how much the units buyback will help increase the REIT’s DPU over the longer term. Keppel REIT has to deploy the capital wisely as it can also be used to purchase other yield-accretive investments.

In 2020, there are some major lease commencements, and that could help improve Keppel REIT’s income available for distribution going forward.

Source: Keppel REIT earnings presentation

It’s worth noting that the office tower at 311 Spencer Street comes with fixed annual rental escalations, which provides the REIT with some organic growth.

Overall, though, I can’t see significant growth prospects for Keppel REIT, but since it is undertaking some measures to grow, I’m giving this criterion a pass.

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At Keppel REIT’s unit price of S$1.22, it is valued at a PB ratio of 0.86x.

Over the past five years, its average PB ratio stood at around 0.79x.

The current PB ratio is slightly higher than the average over the last five years. Therefore, Keppel REIT looks expensive right now.

Verdict: Fail

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At Keppel REIT’s unit price of S$1.22, it has a distribution yield of 4.6%, which is too low for my liking.

Verdict: Fail

The Final Verdict

Keppel REIT has a final score of 4/10.

I’ll skip investing in Keppel REIT due to its lack of growth in both its revenue and DPU. Keppel REIT’s valuation is also not enticing enough, given its weak historical financial growth.

Would You Invest In Keppel REIT?

Come discuss your thoughts and more in our Seedly Community under a page specifically dedicated to Keppel REIT (SGX: K71U).

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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