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Monday, July 27, 2020

Keppel REIT Analysis @ 27 July 2020

Basic Profile & Key Statistics
Keppel REIT (KREIT) is an office focus REIT which listed on 28 April 2006. KREIT is sponsored by Keppel Land Limited which is a subsidiary of Keppel Corporation.

Lease Profile
Occupany is high at 98.6%. WALE is long at 4.6 years, where the highest lease expiry of 22.4% falls in the year 2022. Weighted average land lease expiry is long at 88.14 years.

Debt Profile
Gearing of 36.3% is at SREITs median level. Cost of debt of 2.5% is low. Fixed rate debt is close to SREITs median level where unsecured debt is slightly lower at 71.6%. Even with low cost of debt, its interest cover is at the low side of 3.5 times. WADE is long at 3.6 years where the highest debt maturity of 38% is in the year 2024. 

Diversification Profile
KREIT is not diversified enough in terms of geographical as 72.5% of its income is from Singapore Properties. Its flagship property - Ocean Financial Centre contributes a high 39.5% of gross revenue. However, its top tenant contribution is low at 6.2% while top 10 tenants contribution of 34.7% is slightly lower than SREITs median level.

Key Financial Metrics
Property yield is very low at only 3.4%, due to its high property valuation in prime locations. Management fees over distribution is very high at 24.8% which translates into S$ 4.03 for every dollar paid. Distribution on capital at 2.7% is low as well, this is affected by high property valuation too. Distribution margin is high at 65.6%, this figure exclude 8.5% distribution from asset disposal. As per my previous post on Case Studies for SREITs with Capital Distribution from Disposal, there is a remaining fund in which management can CHOOSE to distribute this to support its DPU. 

Related Party Shareholding
REIT Sponsor is holding significant stake in KREIT, while both REIT manager and directors of REIT manager shareholding are low.

NAV per unit is on a slight downtrend for the past 5 years. Distribution margin is on a slight uptrend. KREIT DPU is on a downtrend but stabilized from 2Q 2017. The sudden drop of DPU is because of lack of distribution from asset disposal starting 4Q 2016, but it started back from 4Q 2018 until now.  For the past 5 years, average 10% of its DPU was from distribution from assets disposal and income support. Its income support has ended in 1Q 2019, but distribution from asset disposal still continues.

Fundamental Valuation
Favorable Less Favorable
Occupancy Interest Cover Ratio
WALE Concentrated Debt Maturity
Weighted Average Land Lease Expiry Top Geographical Contribution
Cost of Debt Top Property Contribution
WADE Property Yield
Top Tenant Contribution Management Fees
Distribution Margin Distribution on Capital
If we remove the property yield and distribution from capital from negative points which are affected by high property valuation due to its properties in prime locations, KREIT fundamental is considered above average. As mentioned previously, I would prefer REITs to have their DPU derived from operation instead of asset disposal and income support. 

Relative Valuation
i) Average Dividend Yield
Apply past 4 quarters DPU of 5.6 cents to average value of 5.3% will get S$ 1.06.
ii) Average Price/NAV 
Apply NAV of S$ 1.344 to average value of 0.8 will get S$ 1.08.

Author's Opinion
KREIT has a strong sponsor in which Keppel Land Limited is a subsidiary of Keppel Corporation. KREIT is also the only SREIT which perform share buy-back in between 2Q 2018 to 1Q 2020. The next thing is to see whether management can do without the distribution from disposal to maintain its DPU. For valuation:
i) Fundamental Intrinsic Value = (Removed)
ii) Relative Valuation - Dividend Yield = S$ 1.06
iii) Relative Valuation - Price/NAV = S$ 1.08
At the current price of S$ 1.09, it is close to the average price of relative valuation.

*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee the accuracy, completeness, and reliability. It should not be taken as financial advice or statement of fact. I shall not be held liable for errors, omissions as well as loss or damage as a result of the use of the material in this blog. Please always do your own due diligence before any decision is made.

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