What Investors Should Know about Keppel REIT’s Latest Earnings

Keppel REIT (SGX: K71U) released its fourth quarter earnings report yesterday. The reporting period was from 1 October 2014 to 31 December 2014.

The REIT is an owner of nine commercial real estate properties in both Singapore and Australia. At the local front, it has stakes in premium grade buildings such as Ocean Financial CentreMarina Bay Financial CentreOne Raffles Quay, and Bugis Junction Towers. You can read more about the REIT in here and here.

Financial highlights

Here’s a rundown of the financial figures from Keppel REIT’s latest earnings release:

  1. Property income clocked in at $42.3 million in the reporting quarter, down about 11% from a year ago. The main cause behind this fall in revenue was the loss in property income from Prudential Tower which was sold in the third quarter this year. For the full financial year 2014, Keppel REIT’s property income was up 5.8% to $184 million compared to 2013.
  2. Quarterly net property income (NPI) also fell by 8.3% for the same reason. NPI came in at $34.3 million, compared to $37.4 million for the same quarter a year ago. For the full financial year 2014, NPI was up a healthy 9.5% to $151.4 million compared to 2013.
  3. Distribution per unit (DPU) for the quarter will be 1.51 cents, a good 23% decline from the pay-out of 1.97 cents seen in the fourth quarter of 2013. The REIT closed out 2014 with a total of 7.23 cents in DPU, a decline from a DPU of 7.88 cents in 2013.
  4. The total portfolio value now stands at $8.2 billion, leading to an adjusted net asset value per unit of $1.40 for the REIT (up 1.4% from the NAV per unit of $1.38 seen at the end of 2013).

As my fellow Fool Chong 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 $17.7 million in the fourth quarter of 2013 to $12.1 million in the reporting quarter had partly contributed to a drop of 23% in DPU for unit-holders. Other contributing factors include the loss of contribution from Prudential Tower.

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

Gearing Ratio 43.3%
Interest Cover 5 times
Weighted Average Debt Maturity 3.6 years
Unencumbered borrowings 72%
All-in Interest Rate 2.00%
Fixed Rate Borrowings 65%
Total borrowings $3.5 billion

Source: Keppel REIT’s earnings presentation

For Keppel REIT, the real test in flexibility of funding will come in 2017 and 2018, when about 41% of its loans become due for repayment. In the fourth quarter of 2014, the REIT managed to refinance 33% of its which are loans due in 2015 and 2016. The progress in refinancing of debt is where Foolish investors should keep a watchful eye on.

Beyond that, it’s worth pointing out that Keppel REIT’s current gearing ratio is on the higher end as well. Foolish investors should note that a single-tier gearing ratio limit of 45% is currently being proposed by the Monetary Authority of Singapore.

The above is just part of a wider range of regulatory changes which the MAS has tabled. According to Channel News Asia, any proposals which go through are estimated to take effect in 2016.

Operational highlights

The REIT had completed the divestment of its 92.8% stake in Prudential Tower on 26 September 2014. As mentioned earlier, the sale has had a negative effect on the REIT’s property income and the NPI for the fourth quarter of 2014.

Keppel REIT’s not just busy selling properties though – it’s also been acquiring real estate. To that point, the REIT had only recently completed its acquisition of a one-third interest in MBFC Tower 3 on 16 December 2014. The occupancy rate for MBFC Tower 3 currently stands at 97%, and we should look towards the income contribution from this acquisition in the next quarter.

Keppel REIT ended the fourth quarter of 2014 with an overall committed occupancy of 99.3%. The REIT also boasted a tenant retention rate of 85% for its office properties. With the expectation of positive demand and limited office supply, Keppel REIT’s Manager “expects rental reversions to be healthy in 2015”.

Foolish summary

Keppel REIT last traded at S$1.23 on Monday. This translates to a historical price-to-book ratio of 0.88 and a distribution yield of around 5.9%.

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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.