Keppel REIT (formerly: K-Reit Asia)

http://infopub.sgx.com/FileOpen/Keppel%2...eID=461857

Keppel REIT's latest financial results paint an interesting picture (pg 6 reference). All in all, rental from the office segment is falling as expected. Keppel has increased its debt load with the issuance of another 75 mil bonds. DPU has fallen from 3.29 cents to 2.87 cent; consistent with the fall in profits and sale of its aussie property.

What amazed me was how despite a decrease in rental income, there was no fair value loss recorded in Keppel's ppty.

Quote:KEPPEL Reit has sold Bugis Junction Towers to Village Prop Pte Ltd for S$547.5 million or S$2,200 per square foot, S$388 million more than the S$159.5 million the property was acquired for in 2006.

SOURCE: Keppel Reit sells Bugis Junction Towers for S$547.5m, S$388m above purchase price

SGX Announcement: DIVESTMENT OF BUGIS JUNCTION TOWERS

Press Release: Keppel REIT unlocks value with divestment of Bugis Junction Towers for $547.5 million

Presentation: Divestment of Bugis Junction Towers

Recently, Keppel REIT fell to about the level of its low during the 2020 early COVID crash. It has since recovered slightly as the market reconsiders the path of interest rates. It yields nearly 7%. There are headwinds, including refinancing at higher than previous rates and the prospect of a major recession. However those two aspects should cancel each other out, as a recession will help moderate interest rates. Is this just a knee-jerk reaction to offices being out of fashion due to work-from-home affecting demand in other markets? I question whether the effect of WFH is as significant in Singapore as in other markets.

(19-11-2023, 09:24 AM)Dosser Wrote: Recently, Keppel REIT fell to about the level of its low during the 2020 early COVID crash. It has since recovered slightly as the market reconsiders the path of interest rates. It yields nearly 7%. There are headwinds, including refinancing at higher than previous rates and the prospect of a major recession. However those two aspects should cancel each other out, as a recession will help moderate interest rates. Is this just a knee-jerk reaction to offices being out of fashion due to work-from-home affecting demand in other markets? I question whether the effect of WFH is as significant in Singapore as in other markets.

Perhaps you can calculate the projected long term yield for the scenario where interest rates stay at current levels and revenue stays the same (no major recession). Currently some REITs are still paying borrowing cost of about 3%. Once locked in rates expire, they may need to borrow at 5-6%, which will definitely impact interest cover and dividend.

Hi Dosser,

Besides interest rate issues, I think the key part of Keppel REIT which some investors might not like is the structure issue. Quite a decent part of their income is derived from JVs/associates, which means they might not have full control on those assets. This might limit the REIT flexibility to consider options like AEIs on those assets, as this needs agreement with the other partners.

(19-11-2023, 10:48 AM)gzbkel Wrote:

(19-11-2023, 09:24 AM)Dosser Wrote: Recently, Keppel REIT fell to about the level of its low during the 2020 early COVID crash. It has since recovered slightly as the market reconsiders the path of interest rates. It yields nearly 7%. There are headwinds, including refinancing at higher than previous rates and the prospect of a major recession. However those two aspects should cancel each other out, as a recession will help moderate interest rates. Is this just a knee-jerk reaction to offices being out of fashion due to work-from-home affecting demand in other markets? I question whether the effect of WFH is as significant in Singapore as in other markets.

Perhaps you can calculate the projected long term yield for the scenario where interest rates stay at current levels and revenue stays the same (no major recession). Currently some REITs are still paying borrowing cost of about 3%. Once locked in rates expire, they may need to borrow at 5-6%, which will definitely impact interest cover and dividend.

To take a look at the impact of projected interest rate changes, what I have done is to take Singapore Overnight Rate (SORA), which was around 2.15% at the start of 2023. The blended all in interest rate for Keppel REIT so far in 2023 is 2.85% according to their latest quarterly financial statement. 

The SORA has increased to 3.66% currently, an increase of 1.51% from 2.15%.

Assuming that the all in Interest rate increases by 1.51%, the all in blended interest rate would be 4.36%. That would cause finance costs  to increase from 48.8 million in 3 quarters to 74.7 million in first 3 quarters of 2024.

Assuming that revenue increases in line with current growth rates i.e., no recession,  maintaining high occupancy, rental reversion etc.., the finance cost increase would wipe out all that and unless Keppel continues its 20 million dollar per year dividend payout to mark anniversary (already indicated so likely to coninue).  

Annualizing all that, 2024 dividend yield will likely be 5.79 cents per unit after factoring in all that, which is slightly lower for 2024, as 2023 has seen 5.85 cents per unit distribution. 

At the current price of SGD 0.86, that is around 6.73% expected yield for 2024, assuming all goes well in refinancing the debt.  

The tricky bit is that there are debt refinancing needed in 2025 as well. So, those will be adding on to finance costs increase in that year.

What a difference a month makes, with a strong boost to the price of Keppel REIT from a sea change in expectations for interest rates, particularly following the FED meeting.