Goodbye Keppel REIT

Keppel REIT Logo

It is another sell transaction for me this month as I divested Keppel REIT from my stock portfolio. Total profit including dividends collected was 26.7%.

After Keppel REIT announced a set of disappointing results on 18th July 2017 due to softening office rents, the share price did not decline as badly. Distribution per Unit (“DPU”) fell 12.77% from 3.29 cents in 1H2016 to 2.87 cents in 1H2017.

Looking at the chart for Keppel REIT share price, it has been on an uptrend over the past 3 months. This proves that the stock market can be irrational.

Below are the reasons I sell off Keppel REIT

1. Medicore Dividend Yield

Based on FY16 total distribution of 6.37 cents, the current dividend yield is 5.5%. If you have noticed from the historical distribution, the DPU is falling for each quarter.

I estimated the annual distribution to be less than 6 cents as there is remaining two quarters to pay out 3.5 cents (6.37 cents minus 2.87 cents) if Keppel REIT wants to match 2016 distribution.

Period Distribution per Unit (cents)
1 Apr 2017 to 30 Jun 2017 1.42
 1 Jan 2017 to 31 Mar 2017 1.45
Total Distribution to date (FY2017) 2.87
1 Oct 2016 to 31 Dec 2016 1.48
1 July 2016 to 30 Sep 2016 1.60
1 Apr 2016 to 30 Jun 2016 1.61
1 Jan 2016 to 31 Mar 2016 1.68
Total Distribution (FY2016) 6.37

2. Declining Office Rent

Average rental rates of Grade A office space is $8.95 per square foot. As the top tenants of Keppel REITs are mainly banks and financial institutions, any decline in the financial sector can have an indirect impact on Keppel REITs as the tenants could reduce operational cost by relocating to cheaper office spaces.

3. Assets are not 100 Unencumbered

Keppel REIT’s current average leverage stood at 38.4%. The current assets are 84% unencumbered and 16% encumbered. When choosing a REIT, I prefer REITs with 100% unencumbered assets. The proceeds from the recent sale of 77 King Street was used to pay off its debt. Although there is no refinancing of debt in the near term, I am not surprise Keppel REIT will continue to sell off its assets to repay its debt if office rents continue to be depressed.

Summary

I will hold on to cash from the sale and invest in a higher yielding dividend stock. That may take time as I think the stock market is slightly expensive right now and it is difficult to hunt for a good company with good yield.

 

3 thoughts to “Goodbye Keppel REIT”

  1. Hi…I sold off mine at a slight loss…but knowing what I know now about its management, it’s a loss I can afford. With its recent purchase of a Melbourne property along Spencer Street, there’s a possibility that a cash-call will happen in the near-future. That’s a risk I cannot afford though.

  2. I have been thinking of selling off Keppel Reit as well. But few consideration not to do so is of the following factors:

    1) Bottoming out and recovery of office rents in 2018
    2) Market seems to react well to the Melbourne property

    $1.20 seems possible ahead. Do you have any opinions with regards to the above considerations?

    1. Hi SPR,

      1) Keppel REIT assets are Grade A office assets. Personally, I observe a trend whereby companies are shifting to Grade B offices (Fraser Commercial Trust) or business parks. You need to look at the office supply and demand moving ahead. While you wait, are you satisfied with the current yield?
      2) If you observe occupants of Keppel REIT are mainly financial institutions since Keppel REIT offices are Grade A and mainly located in the CBD area. A downtrend in financial sector can also indirectly affect Keppel REIT as these occupants move offices to cut losses.
      3) Australia property is currently doing well and I also observe some reits have diversify by including Australian assets in their portfolio as well.
      4) I invest in REITs for their yield and not so much for price growth. Keppel REIT yield seems depressed at the moment since it is yielding below 6%.

      Hope that helps!

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