Keppel REIT’s Latest Earnings: What Investors Should Know

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

The real estate investment trust (REIT) is an owner of nine commercial real estate properties in 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

The following’s a quick take on the latest financial figures from Keppel REIT:

  1. Property income (revenue from properties) fell by 11.4% year-on-year to come in at S$42.2 million in the reporting quarter. 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) also fell for the same reason, retreating by 13.3%. The reporting quarter’s NPI came in at S$33.4 million, compared to S$38.5 million for the same quarter a year ago.
  3. Distribution per unit (DPU) for the quarter was 1.70 cents, an 8.1% decline from 1.85 cents in the third-quarter last year. On a sequential basis, DPU was down by 1.2%.
  4. Assets under management stood at S$8.2 billion. Keppel REIT also had an adjusted net asset value per unit of S$1.37 as of 30 September 2015, down slightly from S$1.39 a year ago.

To sum up the income statement performance, revenue and DPU fell on a year-on-year basis as well as on a sequential basis. Let’s dive a little deeper to take a peek at the moving parts which made up the numbers above.

Rental support is a factor to be wary of in REITs. In Keppel REIT’s case, there was a big drop in rental support from $12.7 million in the third quarter of 2014 to just $4.8 million in the reporting quarter. That said, the fall in rental support was partially offset by stronger 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 a REIT is funded, and its sensitivity to the interest rate environment. These are summarized for Keppel REIT below:

2015-10 Keppel REIT debt table

Source: Keppel REIT’s earnings presentation

Keppel REIT’s balance sheet has taken a number of steps backward. As the table above shows, its borrowings, leverage, and all-in interest rate have stepped up. The REIT’s aggregate leverage ratio, in particular, may need to be watched. The Monetary Authority of Singapore had recently set a single-tier gearing ratio limit of 45% for REITs in Singapore which will come into effect over the next few years.

With Keppel REIT’s aggregate leverage ratio on the wrong side of 40%, the REIT may not have much room to manuveur when it comes to taking on more debt to fund acquisitions.

Elsewhere, Keppel REIT has a well-staggered debt-maturity profile that will see the majority of its loans (~96%) come due on 2017 and beyond.

Operational highlights

As a reminder, Keppel REIT had completed the divestment of its 92.8% stake in Prudential Tower on 26 September 2014. This should be the last quarter where the divestment has an effect on the REIT’s property income and NPI.

The REIT’s Singapore portfolio had a strong quarter, led by a 56% increase in total income from its one-third interest in entities which own the Marina Bay Financial Centre Tower 1, 2 and 3, and Marina Bay Link Mall. But, it’s worth noting that part of the income growth from the one-third interests had been due to rental support and the acquisition of Marina Bay Financial Centre Tower 3 which happened in the fourth-quarter of 2014.

Keppel REIT’s Australian properties, though, suffered double digit year-on-year declines in property income across the board.

On a brighter note, Keppel REIT has completed the renewal of almost all of its 2015 leases with an average of 16% in positive rental reversions. The REIT ended the quarter with an overall 98.5% committed occupancy. Notably, 70% of its leases are not due for renewal till 2018 and beyond.

Regarding the REIT’s outlook for its own future, there was a note of caution in the earnings release:

“Looking ahead, market conditions are expected to be challenging due to the upcoming office supply over the next two years and possible rising interest rate environment.”

To mitigate some of the challenges, Keppel REIT’s manager “will continue to intensify its tenant retention and engagement efforts to support occupancy and rental rates, while maintaining a well-staggered lease expiry profile for sustainable and resilient returns.”

Foolish summary

Keppel REIT last closed at S$1.00 on Monday. This translates to a historical price-to-book ratio of only 0.73 and a trailing twelve months distribution yield of around 6.6%.

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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.