Keppel REIT’s Latest Earnings: What’s Up With The 14% Decline In Distributions?

Keppel REIT (SGX: K71U) released its fiscal first quarter earnings report yesterday. The reporting period was from 1 January 2015 to 31 March 2015.

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

You can read more about the REIT here and catch up with its last quarter’s earnings here.

Financial highlights

Here’s a rundown on Keppel REIT’s latest set of financial figures:

  1. Property income (revenue from properties) fell to $42.4 million in the first quarter, down about 9.4% from the same quarter 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 of 2014.
  2. Net property income (NPI) for the quarter also fell for the same reason – this time by 12.4%. NPI came in at $34.6 million, compared to $39.5 million for the same quarter a year ago.
  3. Distribution per unit (DPU) for the quarter will be 1.70 cents, a good 13.7% decline from the 1.97 cents seen in the first quarter last year.
  4. The total assets under management for Keppel REIT stands at $8.2 billion (as of 31 March 2015). This gives the REIT an adjusted net asset value per unit of $1.39, up from $1.37 a year ago.

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 $13 million in the first quarter of 2014 to $6.2 million in the reporting quarter had helped contribute to the 13.7% drop in its DPU. Other contributing factors include the loss of contribution from Prudential Tower.

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

Aggregate Leverage 42.4%
Interest Cover 4.6 times
Weighted Average Debt to Maturity 3.4 years
Unencumbered borrowings 72%
All-in Interest Rate 2.47%
Fixed Rate Borrowings 65%
Total Borrowings $3.54 billion

Source: Keppel REIT’s presentation

For Keppel REIT, the real test in flexibility of its funding will come in 2017 and 2018, when about 41% of its loans become due.

That said, as of 31 March 2015, the REIT still has $651 million worth of loans that will come due in 2015 and 2016; that will have to be refinanced. The progress in refinancing of debt (especially in areas like the interest the REIT will be paying for the new loans) is where Foolish investors should keep a watchful eye on.

Beyond 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. According to Channel News Asia, any proposals which go through are estimated to take effect in 2016.

Operational highlights

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

On the other side, Keppel REIT has completed its acquisition of a one-third interest in MBFC Tower 3 on 16 December 2014. This quarter saw the first full-quarter contribution from the commercial building. The occupancy rate for MBFC Tower 3 currently stands at 98.8%, which is slightly higher than the quarter before.

With nine out of 11 office towers fully committed, Keppel REIT ended the quarter with an overall 99.3% committed occupancy rate. Looking ahead, management is looking to provide unitholders with income stability and resilience over the long term.

Foolish summary

Keppel REIT last traded at S$1.22 on Monday. This translates to a historical price-to-book ratio of 0.88 and a trailing-12-months distribution yield of around 5.7%.

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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.