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What Does The Future Look Like for Keppel REIT? Part 2

Previously, we looked at the contributions of five of the nine prime properties that Keppel REIT owns. In this article, we will have a closer look at the contribution of the rest of the properties. We will also look at the rental support and debt profile of the REIT.

As a recap: Keppel REIT (SGX:K71U) has outperformed over the last five plus years,  recording returns of about 111%. Over the past five financial years, the Real Estate Investment Trust (REIT) has also paid out total distributions exceeding 36 cents per unit. In comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 74% for the same duration.

A closer look at other income sources

Keppel REIT income from partial stakes

Source: REIT earnings report

The chart above shows the contribution of its partial ownerships of properties (less than 50% stake). Keppel REIT receives dividend income, interest income, and rental support for these partial ownerships. Rental support is also received for its stakes in the Marina Bay Financial Center Phase 1, the One Raffles Quay and the Ocean Financial Centre.

From this view, we can see that total income (includes rental support) from its stakes in Marina Bay Financial Center Phase 1, and One Raffles Quay are major contributors to income. The rental support for the Ocean Financial Centre is also significant, and is comparable to the contributions from the Marina Bay Financial Center Phase 1.

My fellow Fool Ser Jing shared before that rental support is a factor to be wary of in REITs. In this instance, the drop of $15.2 million in total income (from 2009 to 2013) from its stake in One Raffles Quay could be attributed to the gradual loss in rental support. With this in mind, Foolish investors might want to keep a watchful eye on the decline of the significant rental support for the Ocean Financial Centre. The NPI for the Ocean Financial Centre should keep pace with the decline in rental support.

Moving on, Foolish investors might also want to study 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. To do that, we can look at the latest quarterly earnings presentation for the quarter ended 30 September 2014.

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

For Keppel REIT, the real test in flexibility of funding will come in 2017 and 2018, when half of its loans become due. Its current gearing ratio is on the higher end as well. Foolish investors should to note that a single tier gearing ratio limit of 45% is currently being proposed by the Monetary Authority of Singapore. According to Channel News Asia, any proposals which go through are estimated to take effect in 2016.

A quick look ahead

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 take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the REIT’s share price is supported by the quality of growth that we are looking for.

According to author Bobby Jayaraman, in his book Building Wealth Through REITs,  rentals for commercial buildings might be affected by overseas investments and the general health of different parts of Singapore economy.  Factors like these affect the demand for prime commercial buildings.

Individual investors should also note that there has been periods of time where prime grade office rental prices have been depressed, and subsequently over-priced. Keppel REIT might not be immune to such cycles. As such, a better awareness of the supply and demand cycle for prime grade office space might be helpful.

Keppel REIT’s share price last traded at S$1.2o as of last Friday (25 October 2014). 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.