What Does The Future Look Like for Keppel REIT?

Keppel REIT (SGX:K71U) has outperformed over the last five plus years. The share price recorded returns of about 111% from 1 Jan 2009 to the closing price on last Friday (25 October 2014). Over the past five financial years, the Real Estate Investment Trust (REIT) has also paid out a total exceeding 36 cents per unit in distributions. 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.

Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. As per the Monetary Authority of Singapore’s (MAS) rules, REITs are mandated to distribute at least 90% of its profits as distributions to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

Keppel REIT started its life in the Singapore share market in April 2006. Back then, it was known as K-REIT, before being renamed as Keppel REIT in 2012. In the past seven plus years, it has been able to grow its assets under management from $630 million to an amount exceeding $6.8 billion.

So, while the returns from Keppel REIT has been co-operative — as Foolish investors, we should look behind the curtains to understand how sustainable the distributions are, and how it can grow.

A closer look

To get a sense of the resilience of the property portfolio, we can look at the gross revenue by property of the REIT. 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, One Raffles Quay, and Bugis Junction Towers. It also owns a 33.3% stake in the Marina Bay Financial Centre (Tower 1 and Tower 2) and Marina Bay Link Mall. Collectively, the two towers and link mall is known as Marina Bay Financial Centre Phase One.Keppel REIT graph 1

Source: REIT earnings report

The property income above primarily covers revenue from gross rental together with car park income and others. The property income was reported for commercial buildings where the REIT has more than a 50% stake. As such, it excludes the Marina Bay Financial Centre Phase 1, the One Raffles Quay building, the 8 Chifley Square Building (Sydney, Australia) and the Old Treasury Building (Perth, Australia).

From the progression of the historical property income, the Ocean Financial Centre acquisition turned out to the main contributor of growth in property income. It made up more than half of the property income for the financial year ended 2013. The financial year for the REIT aligns with the calendar year.

Other notable decisions include the strategic swap of the Keppel Towers and GE Tower for a one third interest in the Marina Bay Financial Centre Phase 1 with Keppel Land (SGX:K17) on 15 December 2010. Incidentally, Suntec Estate Real Investment Trust (SGX:T82U) is the other party which owns an equivalent one third interest.

On top of that, the REIT 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”. Therefore, we should not see further contributions from this property in 2014.

Besides its actions at the local front, Keppel REIT has been active in Australia as well. The REIT has picked up freehold properties at 275 Georges Street, 77 King Street and 8 Exhibition Street — all of which drove property income growth in the past five plus years.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the Net Property Income (NPI) of the properties. The NPI is defined as the gross rental revenue of a property minus all related expenses.

Keppel REIT graph 2

Source: REIT earnings report

The chart above shows the NPI for commercial buildings where Keppel REIT has more than a 50% stake. As expected, the Ocean Financial Centre again makes up the bulk of the NPI contribution. Its acquisitions in Australia also had a meaningful impact on NPI growth, as it did with the property income.

Beyond that, Keppel REIT also receives dividend income, interest income, and rental support for its partial ownership of buildings (less than 50% stake). Rental support is also received for its stakes in Marina Bay Financial Center Phase 1, One Raffles Quay and Ocean Financial Centre. We will explore these contributions in Part 2 of this article.

Foolish Take away

Keppel REIT’s share price last traded at S$1.20 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%.

You can read the second part of this article here. For more investing news, sign up now for a FREE subscription to The Motley Fool’s weekly investing newsletter Take Stock Singapore. 

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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 owns shares in Suntec REIT.