Keppel REIT’s Latest Earnings: What Investors Should Know

Keppel REIT (SGX: K71U) released its fiscal second-quarter earnings report yesterday evening. The reporting period was from 1 April 2015 to 30 June 2015.

The real estate investment trust (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 catch up with its last quarter’s earnings here.

Financial highlights

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

  1. Property income (revenue from properties) fell to $42.9 million in the reporting quarter, down about 9.3% 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 11.4%. NPI came in at $34.7 million, compared to $39.2 million a year ago.
  3. Distribution per unit (DPU) for the quarter will be 1.72 cents, a good 9.5% decline from 1.90 cents in the same quarter last year.
  4. Assets under management stood at $8.2 billion and the REIT ended the fiscal second-quarter with an adjusted net asset value per unit of $1.38, unchanged from a year ago.

As mentioned, both revenue and DPU for Keppel REIT fell on a year over year basis. That’s not healthy, but it may be encouraging to see that both measures rose on a quarter over quarter basis; investors might want to keep an eye on further developments in this area.

Rental support can be something to be wary of in REITs. In Keppel REIT’s case, there was a big drop in the rental support from $12.3 million in the quarter of 2014 to just $4.8 million in the reporting quarter. Fortunately for Keppel REIT, this was offset by a higher share of results from associates and joint ventures.

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

Keppel REIT's balance sheet details (21 July 2015)

Source: Keppel REIT’s earnings presentation

For the reporting quarter, the REIT had made progress by refinancing all of its obligations in 2015 ($575 million) and most of its borrowings in 2016 ($325 million). The REIT also made an early refinancing of $100 million of its 2017 loans. On top of that, its distributable income from Australia was also mostly hedged.

On the other hand, Keppel REIT’s gearing ratio remains on the higher end. Foolish investors should note that the Monetary Authority of Singapore had recently set a single-tier gearing ratio limit of 45% for REITs in Singapore.

In addition, investors might want also want to keep an eye on the REIT’s interest costs. As the table above shows, Keppel REIT’s all-in interest rate had creeped upward in the reporting quarter compared to June 2014. With only 65% of Keppel REIT’s borrowings currently on fixed interest rates, an environment of rising interest rates may hurt Keppel REIT’s bottom-line.

Operational highlights

As a reminder, the REIT completed its divestment of its 92.8% stake in Prudential Tower on 26 September 2014. The divestment continues to have an effect on the REIT’s NPI for the reporting quarter.

On the brighter side, Keppel REIT has renewed almost all of its leases expiring in 2015 with an average positive rent reversion of 18%. The REIT ended the quarter with an overall committed occupancy level of 99.3%. It’s also notable that 80% of Keppel REIT’s leases are not due for renewal till 2017.

Foolish summary                                         

Keppel REIT last traded at S$1.12 on Monday. This translates to a historical price-to-book ratio of 0.81 and a trailing-12-months distribution yield of around 6%.

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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.