Keppel REIT (SGX: K71U)'s Net Property Income Dropped 7.2% But DPU Hold


Source: Keppel REIT's homepage



Keppel REIT (SGX: K71U) has recently announced its first-half 2020 financial results. It is currently trading at 5% yield based on the last traded of $1.10 based on 29 July.


Key Highlights:


  • Distribution per unit (DPU) and Dividend Yield (5%)

  • Price to book ratio (0.81)

  • Gearing (36.3%)

  • Interest coverage ratio (3.5x)

  • Portfolio occupancy rate (98.6%)

  • Growth catalyst


Background of Keppel REIT


Keppel REIT manages a portfolio of prime commercial properties in Singapore, Australia, and South Korea that worths S$7.9 billion.


Its core assets in Singapore includes Ocean Financial Centre (79.9% interest), one-third of Marina Bay Financial Centre Towers 1, 2 and 3 and Marina Bay Link Mall, and one-third of One Raffles Quay.



1. Distribution per unit and dividend yield


Net property income for second-quarter slid 7.2% to $28.8m. This was mainly due to lower gross rental income from Ocean Financial Centre, divestment of Bugis Junction Towers and rental relief given to eligible tenants. However, its DPU was up marginally by 0.7% due to the capital gain from previous divestment.


Based on its latest price, the REIT is currently trading at about 5% dividend yield. The REIT does not pass our DPU criteria as it has been declining over the years. Its current yield is also well below the historical average yield of 6.38%.


2. Price to book ratio


Over the past 8 years, Keppel REIT has been trading at an average price to book ratio of 0.82, which is very close to its current price to book ratio of 0.81, indicating a 20% discount on its net asset values.


3. Gearing


Portfolio leverage remains conservative at 36.3%, which gives Keppel REIT more than $900m of debt headroom for future growth and acquisitions. The debt tenor remains healthy at an average of 3.6 years.


4. Interest coverage ratio


Keppel REIT has an interest coverage ratio of 3.5 times, which is below our preference of 4 times. Besides, the REIT maintains a low overall interest cost of 2.48%.


5. Portfolio occupancy rate


Portfolio occupancy remains high at 98.6%. Most of its properties remain at almost full occupancy. This shows that its portfolio is well-positioned at a strategic location.

Source: Keppel REIT's First Half Financial Results Presentation

6. Growth Catalyst


Moving forward, the manager will continue to optimise the leasing strategy to meet the potential changes and demands by the tenants. The management believes that physical offices will remain a necessity in the long run despite the increasing interest on "work from home" arrangement.



Summary


The REIT's high occupancy rate, low interest cost and long weighted average lease expiry give a certain level of income resilience against the Covid-19 pandemic. However, its declining DPU trend is worrying and yield remains unattractive at current price.


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