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Is Keppel REIT Really Cheap?
Corporate Digest, Featured | 30 September 2014
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By: Peter Ng
Articles (81) Profile

Is Keppel REIT Really Cheap?

Previously, we have put on the Shares Investment’s magnifying glass as analyses were performed on Suntec Real Estate Investment Trust (REIT) and Soilbuild Business Space REIT. Since then till now, the discount to their respective net asset values has contracted substantially as prices began to propel upwards.

This is a testament that investing in a fundamentally sound business at a discount will eventually reward an investor as the market becomes rational and prices these securities correctly.

Next up, we will examine Keppel REIT which is well known for its 33.3 percent interest in the iconic Marina Bay Financial Centre (MBFC).

Industry Profile And Tenant Profile

Keppel REIT falls within the commercial and office REIT category. As at 29 September 2014, Keppel REIT’s forecast annual distribution yield is 6.4 percent, which puts it slightly above the average distribution yield of commercial and office REITs of 6.3 percent.

Keppel REIT’s tenant profile reveals that 47.6 percent of its leases are concentrated in banking, insurance and financial services sector

However, referring to the tenant profile of Keppel REIT reveals that 47.6 percent of its portfolio is leased to the banking, insurance and financial services sector. Consequently, this imposes a concentration risk to the trust if a slowdown pertaining to this sector occurs, and subsequently having a negative impact on its gross rental.

Gearing And Debt Maturity

Prior to Keppel REIT’s recent acquisition of MBFC Tower 3 and divestment of Prudential Tower, its gearing ratio stood at 45.3 percent as at 30 June 2014, ranking it the highest among all the other comparable office and commercial REITs.

It was only after a combination of the proceeds generated from the sale of Prudential Tower and placement of new units that expanded Keppel REIT’s unitholders’ funds by $436.8 million to $4.3 billion, which resulted in a reduction of its gearing ratio to 37.3 percent, on a pro-forma basis as of 31 December 2013.

At the new gearing level, it is closer to the average of the gearing level of other office and commercial REITs (36.6 percent).

Occupancy Rate And Lease Expiry Profile

Keppel REIT’s overall portfolio registered an impressive occupancy rate of 99.4 percent as at 2Q14. The trust has maintained an occupancy rate of at least 99 percent for the past five quarters.

According to statistics relating to Singapore’s core central business district’s occupancy rate published by CBRE Group, Keppel REIT was able to maintain a higher occupancy rate for the past 21 quarters.

Keppel REIT’s lease expiry profile shows that 37.4 percent of its leases will expire between 2016 and 2017

Examining the trust’s lease expiry profile as at 30 June, uncovers that lease expiries are mostly concentrated between 2016 and 2017 where a total of 37.4 percent of its leases will expire during the two years.

Noting that a higher concentration of lease expiries in a single year could affect the trust’s bargaining power to negotiate for higher rental reversions, this is an area which investors should pay attention to.

SI Research Takeaway

Keppel REIT’s annual distribution yield and gearing level looks acceptable on hindsight, however, an investor should be mindful of the trust’s exposure to the concentration risks of tenants and lease expiries.

Furthermore, the price paid for a recent acquisition of a 33.3 percent interest in MBFC Tower 3 was above the property’s valuation, suggesting that capitalisation rates for the property could potentially drag the overall portfolio’s performance.

I would end off this article with a famous quote from Warren Buffett “It is far better to own a good business at a fair price than a fair business at a good price”.

While purchasing businesses at a discount could be a valuable strategy to employ in the world of investing, however, investors should investigate whether a discount is a market mispricing or the result of a risk adjusted discount.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

Keppel REIT  1.250 -0.020 -1.57%   
Business: Real Estate Invs Trust. Invs in a portfolio of quality real estate and real estate related assets.

Insight: Jul-19, 1H19 property income declined 12.5% mainly... Read More

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