Should You Invest In Keppel REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of Keppel REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Information Is Accurate Up To Feb 2024

Business Description

Keppel REIT is an office REIT that was listed in 2006 and owns 13 properties across Singapore, Australia, Korea and Japan.

What I Like About Keppel REIT:

• The quality of the underlying properties is rock solid with a high exposure in grade A properties in Singapore thereby providing a high stability in the operating performances.
  

• Properties have high weighted average lease expiry and high tenant retention track record over the years (Figure 12)
  

• Tenants are well diversified and are mostly either MNCs or government agencies that have the purchasing power and need to renew their leases regardless of economic cycles.
  

What I Do Not Like About Keppel REIT:

• The headline distribution per unit/dividend yield is heavily affected (around 39%) by non-operational items (i.e. capital distribution and income support) as well as non-cash items (i.e. management paid in units) which makes valuation a bit tricky – especially if you were to solely stick to its intrinsic value solely based on operating performances (Figure 7)
  

Updates From Recent Performance (FY 2023)

General Comments:

• DPU from operations per unit had decreased (14.7%) at the back of higher borrowing costs and an enlarged shareholder base
  

• KR Ginza II had achieved a 100% occupancy rate
  

• Decent rental reversion (+9.9%) and retention rate (73.7%)
  

• Property valuation increased slightly as the gains in Singapore properties managed to offset the losses in valuations of the Australian properties.
  

• Anniversary distribution of $ 20 million per year will help support the distribution per unit till 2027. However, investors best pay attention to the operating performance during this period as should operating performance deteriorate, the DPU will sink and price action might be badly affected by the sudden poor DPU due to the absence of the anniversary distribution.

Positive Headwinds:

• -

Negative Headwinds:

• 22% of its debt is due for renewal in 2024 of which the larger chunk of the refinancing is expected to be renewed in the first half of this year where interest rates are expected to remain high. This will further increase the cost of borrowing which will result in further deterioration in bottom line performances and DPU in FY 2024.

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- Work In Progress -

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore