Keppel REIT’s Latest Earnings: What Investors Should Know

Keppel REIT (SGX: K71U) released its fiscal first-quarter earnings report yesterday evening. The reporting period was from 1 January 2016 to 31 March 2016.

The real estate investment trust (REIT) is an owner of eight premium office assets (with 11 towers) 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 the results from its last quarter here.

Financial highlights

The following’s a rundown on the latest financial figures:

  1. Keppel REIT’s property income (revenue from its properties) fell by 2.9% year-on-year to end at $41.2 million in the reporting quarter.
  2. Subsequently, net property income (NPI) for the quarter also fell, retreating by 4.8% year-on-year to $32.9 million.
  3. The REIT’s distribution per unit (DPU) was 1.68 cents, a 1.2% decline from the 1.70 cents paid out in the first-quarter last year.
  4. As of 31 March 2016, the REIT’s assets under management stood at $8.2 billion. Keppel REIT had an adjusted net asset value per unit of S$1.42 as of 31 March 2016, a 2.2% increase from a year ago.

Moving on, Foolish investors might also want to keep an eye on the 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 below:

Keppel REIT balance sheet (15 April 2016)
Source: Keppel REIT’s earnings presentation

There were some improvements to the REIT’s debt profile. Keppel REIT managed to lower its gearing ratio to 39% and increased the percentage of its borrowings on fixed interest rates.

But despite the lowered gearing ratio for Keppel REIT, investors should note that the Monetary Authority of Singapore had recently set a single-tier gearing ratio limit of 45% for REITs in Singapore.

Keppel REIT also said that there are no refinancing requirements until the second-half of 2017. Given the higher all-in interest rate seen in the reporting quarter compared to the previous year, the terms of any new borrowings would be worth watching. Keppel REIT has also hedged nearly all of its distribution payments from Australia for 2016.

Operational highlights

In all, overall revenue and DPU fell compared to last year. Let’s dive a little deeper to look at the moving parts under the covers.

The divestment of 77 King Street on 29 January 2016 was part of the reason why the property income fell.

Rental support is another factor to consider. In Keppel REIT’s case, there was a 32% drop in rental support from $6.2 million in the first-quarter of 2015 to $4.2 million in the reporting quarter. Elsewhere, interest income fell 3.7% year-on-year to $8.6 million. Meanwhile, share of results from associates had stepped down by 7.8% from the previous year to $18.8 million. Share of results of joint ventures, though, rose over 68% to $6.8 million.

On a brighter note, Keppel REIT has completed the renewal of over three-quarters of the total leases expiring in 2016. The REIT ended the quarter with an overall 99.4% occupancy rate. Notably, 85% of its leases are not due for renewal until after 2018 and beyond.  The REIT also reported a 99% tenant retention rate and a positive rent reversion of 7% for the quarter.

Regarding an outlook for the Singapore office market, this is what Keppel REIT had to say in the earnings release (90% of the REIT’s portfolio is based in Singapore):

“CBRE expects the down cycle in the office sector to persist through the rest of 2016 with vacancy levels picking up from 3Q 2016 as the market awaits the completion of major new CBD developments. However, with very limited confirmed supply from 2018 onwards, CBRE is of the opinion that the market could recover earlier than expected.”

Foolish summary

Keppel REIT last closed at $1.00 yesterday. This translates to a historical price-to-book ratio of 0.70 and a trailing distribution yield of around 6.8%.

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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.