Keppel REIT - Does Lower DPU = Lower Potential?

A visitor to this blog asked about Keppel REIT (K71U) in the comments section of my Keppel DC REIT post. I'd been focusing on Keppel DC at the time, but I told him that I thought it would be a good time to enter Keppel REIT if the price dropped under $1.00. Following that, I began taking a serious look at Keppel REIT.

Keppel REIT has ownership of commercial properties in Singapore and Australia. They have stated in their FY2016 earnings release that 2016 was a "difficult year for the Singapore office market given the oncoming supply of office space and aggressive leasing efforts from newly completed buildings." We can expect these troubles to continue into 2017.

Keppel REIT's stock price reached highs of 1.13+ in late 2016, a sharp increase from the 0.90+ at the beginning of the year, representing an approximate 25% increase. The price eventually tapered down near to $1.00 in January 2017. FY2016 financials dropped across the board, with total property income at S$161.25 million, down 5.3% from the previous year's S$170.35 million. Distributable income dropped to S$208.12 million from S$217.27 million, a drop of 4.2%. As explained by Keppel REIT management, these drops were mainly due to (1) the divestment of  Australian asset 77 King Street in 1Q2016, thus lending no contribution in the following quarters, (2) less contribution from Bugis Junction Towers, due to occupancy issues (94% filled at the end of 2016).

Distribution per unit (DPU) for FY2016 was 6.37 cents, a drop of 6.3% from FY2015's 6.80 cents. Based on a stock price of $1.02 as at 31 December 16, total yield would have been 6.2%.

Management, however, reported good performance from Singaporean assets at One Raffles Quay, Marina Bay Financial Centre, and Australian assets at 8 Chifley Square. While total borrowings only recorded a slight improvement from FY2015, Management has completed all refinancing requirements for 2017. Percentage of their debt portfolio at fixed-rate borrowing is 75% (a change from 70% in 2015), giving their debt portfolio a slight buffer against volatility, especially as potential interest rates hikes are introduced in 2017.

A record-setting bid was made for the Central Boulevard office site, which is expected to be completed in the first half 2017. Office rents should drop as office space floods the market, continuing the troubles Keppel REIT encountered in 2016. Overall portfolio occupancy for Keppel REIT stands at 99.2%, which is still high. Any impact that lower office rental prices may have on Keppel REIT in FY2017 is buffered by the fact that only 3.9% of leases are pending renewals in 2017.

Keppel REIT closed at $1.015 yesterday evening. Although the Singapore office market is to be facing gloomy days ahead, this S-REIT still has steady financials and fundamentals. At current prices, they represent a cheap alternative for dividend investing. I chose to bolster the dividends section of my portfolio by picking up 2000 units at $1.015. I will monitor the office market through 2017, to see how badly office rental prices are affected, and react accordingly.

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In the meantime, I sold off my holdings of DBS at $18.85, netted a rough 6% return. This leaves me with some extra cash to park somewhere else in the near future. Blue-chip wise, I will be looking at Singtel and SGX.

Until next time.


Creed