Keppel REIT (SGX: K71U) may be one of the largest real estate investment trusts (REITs) in Singapore and have a portfolio of some of the newest Grade A office buildings in Singapore’s central business district. But despite many of its assets located in Singapore’s key locations, there are a few chinks in its armour that suggests investors ought to stay away for now.
Poor track record
When investing in a REIT, I look for REITs that have a track record of consistent, or better yet, growing distributions. Keppel REIT’s distribution history has been the opposite. In the last couple of years, its distribution per unit (DPU) has declined sequentially each year.
Source: Author’s compilation of data from annual reports
Singapore’s average office rent market was on a decline between 2015 and 2017 due to new supply and slow demand, which was one of the main reasons for its poor recent track record.
Limited financial flexibility
A possible driver of growth for a REIT is acquisitions to improve its distribution per unit (DPU). A REIT that has the financial flexibility for acquisitions will more likely be able to increase its distributions in the future.
Keppel REIT, however, has a gearing ratio of 39.1%, which is dangerously close to the 45% regulatory limit. As such, it is unlikely to be able to make any debt-funded acquisitions that can improve its DPU. Any acquisitions made in the future will likely be funded by funds raised through new equity.
Limited organic growth opportunity over the next two years
As mentioned earlier, the office market rents in Singapore were poor between 2015 and 2017. But over the last few quarters, things seem to have been improving. Average Grade A office rents have improved to S$10.45 per square foot from its low of S$8.95 in March 2017. However, Keppel REIT is unlikely to capitalise much on the improving market. Only 14.6% of its total rents are due for rent review or expire in the rest of 2018 and 2019. As such, I foresee limited organic growth in rental income in the near term, despite the improving office market environment in Singapore.
The Foolish bottom line
Right now, Keppel REIT sports a distribution yield of slightly under 4.9%. For a REIT, a 4.9% yield is considered quite low. As of July this year, the 40-plus REITs and stapled trusts in Singapore had an average yield of around 6.7%. Considering that Keppel REIT has had a spotty past and has limited growth prospects in the near future, its low yield certainly does not seem attractive to me.
Maximise dividends on your REITs with our brand-new Complete Guide To Buying The Best Singapore REITs. We reveal everything we think you need to know about finding the best REITs that hands you a fat dividend cheque ...even if you have no REITs experience at all! Get instant access to your 100% FREE, actionable, 42-page PDF guide here.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia owns units in Keppel REIT.