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.
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.