Keppel REIT’s Latest Earnings: Lower Distributions Seen

Keppel REIT (SGX: K71U) released its fiscal second-quarter earnings yesterday evening.

As a brief background, Keppel REIT is a real estate investment trust with a portfolio of eight office assets located in Singapore (four properties) and Australia (also four). The REIT currently has assets under management of around S$8.3 billion.

With that, let’s jump into Keppel REIT’s latest earnings.

Financial and balance sheet highlights

Here are some of the REIT’s latest financial figures:

  • For the quarter ending 30 June 2016, net property income (NPI) fell by 6.5% year-on-year to S$32.5 million. This was on the back of a 5.6% dip in property income to S$40.6 million. Keppel REIT attributed the lower NPI to an absence of income from 77 King Street, which was sold in the first-quarter of 2016.
  • Distributable income followed, decreasing by 4.2% to S$52.5 million from S$54.8 million a year ago.
  • Consequently, Keppel REIT’s distribution per Unit (DPU) fell by 6.4% to 1.61 cents from 1.72 cents in the second-quarter of 2015.
  • The REIT ended the reporting quarter with an adjusted net asset value (NAV) per unit of S$1.41, up 2.2% from the S$1.38 seen a year ago.

Let’s now move onto Keppel REIT’s debt profile:

  • Keppel REIT’s aggregate leverage had dropped from 42.6% in the second-quarter of 2015 to 39% in the reporting quarter. The percentage of debt on fixed-rates had also improved from 65% to 75%. In addition, the interest coverage ratio had increased from 4.5 times to 4.6 times.
  • But, the all-in interest rate had ticked up slightly from 2.5% a year ago to 2.55% in the reporting quarter. The weighted average term to expiry was maintained at 3.9 years.

Business highlights

Occupancy levels for Keppel REIT’s portfolio are currently a healthy 99.7%, up from the 99.3% seen in the same quarter in 2015. Investors may want to note that Singapore’s core CBD office occupancy in the second-quarter of 2016 is 95.1%, according to real estate research firm CBRE.

Keppel REIT also reported a weighted average lease expiry (WALE) of six years, which is unchanged from a year ago.

On lease renewals, the REIT stated that “[a]lmost all the leases expiring in 2016 have been renewed, with only a minimal 0.6% of expiring leases due for renewal in 2H 2016, a significant improvement from 13.4% as at the beginning of 2016.”

In addition, “[a]pproximately 90% of leases are not due for renewal till 2018 and beyond, and approximately 85% of leases not due for renewal till 2019 and beyond, when limited to no new office supply in the central business district is expected.”

Future Prospects

Looking ahead, Keppel REIT warned that the Singapore office market “will remain challenging in the next two years given the impending new supply.” To face this challenge, Keppel REIT will focus on tenant retention and attraction in order to have a “healthy and long lease expiry profile.”

On Australia, the REIT reported that occupancy rates in Sydney and Melbourne’s office markets have improved in the reporting quarter when compared to the first-quarter of 2016. Keppel REIT said, “[I]mproved business sentiments prompted companies to look beyond the short-term financial market volatility and make long-term strategic real estate decisions.”

All told, Keppel REIT’s manager thinks that the REIT is” well positioned to weather the current challenging conditions, supported by its proactive leasing and capital management, as well as its sterling property portfolio and quality tenant profile.”

Keppel REIT closed at a price of S$1.08 per unit last evening before the earnings were announced. This implies a price-to-book ratio of 0.76 based on the REIT’s latest book value.

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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 Esjay does not own shares in any companies mentioned.