Latest Earnings From Keppel REIT: Distributions Decline

Last evening, Keppel REIT (SGX: K71U) announced its fiscal third-quarter earnings for the year ending 31 December 2016. The reporting period was from 1 July 2016 to 30 September 2016.

Keppel REIT is a real estate investment trust with a focus on commercial properties. Its portfolio currently consists of eight office assets located in Singapore (four) and Australia (four). These assets have a collective value of S$8.3 billion.

Let’s dig into Keppel REIT’s latest earnings to better understand how it performed.

Financial highlights

The following is a quick summary of some of the REIT’s latest numbers:

  • For the reporting quarter, net property income (NPI) fell by 5.4% year-on-year to S$31.6 million. This was on the back of a 6.3% decline in property income to S$39.5 million.
  • Keppel REIT attributed the lower NPI to an absence of income contribution from the 77 King Street property which was divested in the first-quarter this year. This was partially offset by higher property income and NPI from Ocean Financial Centre. If the numbers from 77 King Street are stripped away, Keppel REIT actually enjoyed a S$0.2 million increase in NPI over the third-quarter of 2015 and property income remained stable.
  • The REIT’s income available for distribution fell as well, by 3.6% to S$52.5 million.
  • Consequently, Keppel REIT’s distribution per Unit (DPU) declined by 5.9% from 1.70 cents a year ago to 1.60 cents.
  • As of 30 June 2016, Keppel REIT has an adjusted net asset value (NAV) per unit of S$1.41, up 2.9% from the S$1.37 seen a year ago.
  • Moving to the balance sheet, Keppel REIT’s aggregate leverage had dropped from 42.6% in the third-quarter of 2015 to 39.0% in the reporting quarter.
  • Fixed-rate borrowings are at 74% of total borrowings in the reporting quarter, an improvement from the 72% seen a year ago. Meanwhile, the interest coverage ratio had also increased (from 4.4 times to 4.7 times).
  • But, the REIT’s all-in interest rate had inched up from 2.5% in the third-quarter to 2.53%.
  • Keppel REIT does not have any refinancing requirements until 2018.

Business highlights

Keppel REIT’s portfolio occupancy level at the end of the third-quarter of 2016 was at 99.5%, up from the 98.5% seen a year ago. The weighted average lease expiry (WALE) also stepped up marginally from 6 years to 6.1 years.

In the earnings release, Keppel REIT stated that all leases expiring in 2016 have been renewed. In addition, proactive forward renewal efforts by the REIT have brought down expires for 2017 and 2018 to just 5.2% and 5.4%, respectively.

Future prospects

Regarding its own future, Keppel REIT had the following comments to share in the earnings release:

The Manager will continue to actively engage tenants to renew and forward renew leases expiring in 2017 and 2018. Keppel REIT’s lease expiry profile remained well spread out, with approximately 95% of leases not due for renewal until 2018 and beyond when very limited new office supply in the CBD is expected between 2019 and 2021.

New office supply over the next one to two years, coupled with slower economic growth, will however continue to pose challenges for the Singapore office market. The Manager’s key strategic focus of proactive lease management and tenant retention to ensure a healthy and long lease expiry profile for its portfolio will provide a sustainable and stable income stream.

The Manager will also maintain a disciplined and prudent approach towards capital management to safeguard against interest rate and foreign currency volatilities as well as enhance its financial capabilities to seize opportunities that may arise during periods of market uncertainties.”

Keppel REIT also mentioned that office rents in Singapore “continued to come under pressure.” But, market researcher CBRE thinks that “a market recovery could start by early 2018.”

As for Australia, the REIT commented that “occupancy levels and prime rents in [Sydney’s central business district] are forecast to improve over the next 12 months.” The CBD office market in Melbourne “is also expected to benefit from strong demand and the lack of new office supply over the next three years.” Meanwhile, Brisbane’s CBD had “recorded strong net absorption in [the second-quarter of 2016] but vacancy is expected to rise for the rest of 2016.”

Keppel REIT’s units closed at S$1.12 last evening. This implies a price-to-book ratio of 0.79 and a trailing distribution yield of 5.9%.

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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.