What Investors Should Know About Keppel REIT’s Latest Earnings Report

Keppel REIT (SGX:K71U) released its third quarter earnings report on 16 October 2014. The reporting period was from 1 July 2014 to 30 September 2014. The REIT is an owner of 9 commercial real estate properties in both Singapore and Australia. At the local front, it has stakes in premium grade buildings such as Ocean Financial Centre, Marina Bay Financial Centre, One Raffles Quay, and Bugis Junction Towers.

Financial Highlights

Property income rose to $47.6 million in the latest quarter, up 8.4% from the quarter a year ago. Net property income also went up by 12.4%. Positive rental reversion of 32.3% from 25,000 square feet of new leases may have contributed to the performance. New leases were signed with companies such as AvePoint, Power Construction Corporation of China, The Executive Centre and Lukoil Oil company.

As my fellow Fool Ser Jing shared before, rental support is a factor to be wary of in REITs. In Keppel REIT’s case, the drop in the rental support from $18.7 million in the third quarter of 2013 to $12.7 million in the past quarter contributed to a drop of 6.1% in distribution per unit for shareholders. Other contributing factors include trust expenses increase, and higher borrowing cost.

For the third quarter of 2014, Keppel REIT will distribute 1.85 cents per unit. An amount of 1.80 cents per unit will be paid out on 12 November 2014 while the remaining 0.05 cents per unit will be paid out on 28 November 2014.

The total portfolio value stands at $6.9 billion.

Foolish investors might want to keep up an eye with the REIT’s debt profile. The debt profile may provide clues on how the REIT is funded, and its sensitivity to the interest rate environment. This is summarized below.

Gearing Ratio 42.1%
Interest Cover* 5.1 times
Weighted Average Debt Maturity 3.5 years
Unsecured borrowings 79%
All-in Interest Rate 2.2%
Fixed Rate Borrowings 72%
Total Borrowings $2.9 billion

Source: REIT Earnings Report / Presentation

For Keppel REIT, the real test in flexibility of funding will come in 2017 and 2018, when half of its loans become due.

Operational Highlights

The company has completed its divestment of its 92.8% stake in Prudential Tower on 26 September 2014. According to Keppel’s earnings presentation in the second quarter of 2014, the stake was sold at a 46.7% premium to the original price of $349.1 million. Proceeds were used to repay existing debt and “general corporate and working capital purposes and/or for pursuing acquisition opportunities”.

Keppel REIT ended the quarter with a 99.3% committed occupancy. It has been able to keep overall occupancy above 98% since the third quarter of 2012. The REIT also boasted a high tenant retention rate of 92%. Banking, insurance and financial services still make up the bulk (46.6%) of the 227 tenants for its property portfolio.

Looking ahead, Keppel REIT announced the proposed acquisition of a one-third interest in MBFC Tower 3 on 18 September 2014. The agreed property value is $1,248 million or $2,790 per square feet. The deal also includes a five-year rental support of $49.2 million. This deal would bring the assets under management up for the REIT to $8.1 billion.

Foolish Summary

Keppel REIT last traded at S$1.2o last Friday. That translates to a historical price-to-book ratio of 0.86 and a distribution yield of around 6.4%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.