Valumetrics Comment: This might be the riskiest office REIT in Singapore

Singapore Business Review released this article today on Keppel REIT being the highest leveraged in the office REIT sector. We would like to add some further comments from our study of the various office REITs such as CapitalCom, FrasersCom, KeppelCom, MapleTreeCom and OUECom . The data tabulated below are from financial reports from year 2014 and 2015. Some may not be the latest but we reckoned, they should not differ much from the latest available financial reports. The trend observed across the various REITs should not be affected much as such. Please see below table:

(S$)	CapitalCom	FrasersCom	Keppel	MapleTreeCom	OUECom
Stock Sticker	C61U.SI	ND8U.SI	K71U.SI	N2IU.SI	TS0U.SI
No. of Shares	2.94E+09	6.77E+08	3.17E+09	2.10E+09	8.72E+08
Price	1.345	1.315	0.96	1.315	0.69
Dividends	2.49E+08	5.73E+07	2.06E+08	1.68E+08	4.60E+07
Net Income	3.70E+08	5.62E+07	1.55E+08	1.56E+08	4.60E+07
Finance Expense	3.64E+07	2.08E+07	6.01E+07	3.49E+07	1.86E+07
Performance Fee	1.36E+07	1.19E+07	4.55E+07	1.87E+07	6.11E+06
Total Assets	6.52E+09	1.88E+09	7.33E+09	4.09E+09	1.68E+09
Equity	5.15E+09	1.09E+09	4.46E+09	2.45E+09	9.58E+08
Current Debt	2.70E+08	0.00E+00	2.75E+08	2.89E+08	1.68E+05
Total Debt	1.24E+09	6.92E+08	2.67E+09	1.55E+09	6.33E+08
Revenue	2.63E+08	1.19E+08	1.84E+08	2.82E+08	7.83E+07
Div/Share	0.0846	0.08	0.07	0.08	0.05
NAV/ Share	1.75	1.61	1.41	1.17	1.1
Yield	6.30%	6.40%	6.80%	6.10%	7.70%
P/NAV	0.77	0.82	0.68	1.13	0.62
ROE	7.20%	5.10%	3.50%	6.30%	4.80%
ROA	5.70%	3.00%	2.10%	3.80%	2.70%
Interest Coverage	10.16	2.71	2.58	4.46	2.47
Average Rate	2.94%	3.00%	2.26%	2.26%	2.94%
Debt/Equity	0.24	0.63	0.6	0.63	0.66
Expense Ratio – Income	3.70%	21.10%	29.30%	12.00%	13.30%
Expense Ratio – Revenue	5.20%	10.00%	24.70%	6.60%	7.80%
Expense Ratio – Assets	0.21%	0.63%	0.62%	0.46%	0.36%
Debt/Divid.	4.98	12.09	12.93	9.2	13.77
Property Yield	4.00%	6.30%	2.50%	6.90%	4.70%

In terms of leverage in the form of debt/equity, most of them are comparable and on the high side except for CapitalCom due to part of its portfolio being invested in a separate Malaysian Office REIT. Only the marked-to-market value of the their investment is shown on the balance sheet, not the underlying REIT assets. So if the assets and liabilities of the Malaysian REIT are listed on the balances sheet, we should expect the debt/equity ratio to rise. A couple of things we should take note of when evaluating REIT’s balance sheet and performance before investing:

1. Interest Coverage: We defined this as the multiple of Net Income over finance expense. The higher the better, more buffer against future interest rate hike. Keppel is one of the worst with 2.58x. OUE is the worst with 2.47x. This means for every dollar of interest paid. Keppel has $2.58 of net profit and OUE has $2.47
2. Debt/Dividend: You can see this as how many years it will take for the current distributed income to pay off the debt. Again Keppel is one of the worst with 12.9x
3. Property Yield: This is defined as the Gross Revenue over the Asset holding value. Keppel is surprisingly low on this with 2.5% and being much lower than the rest at ~5 to 6%. This shows that they are not as effiicent in generating revenue from their assets compared to the rest. Not a good sign.
4. Expense Ratio: This shows how much managers are paying themselves for managing the assets. Keppel has the highest at close to 25% compared to the average of less than 10%. We don’t understand why they can pay themselves so much. This does not seems fair to the shareholders.
5. ROE and ROA are also the lowest among all for Keppel REIT.
6. It has one of the highest yield and lowest Price to book Value which indicates its share price been beaten down and the market is awarding them with a lower price multiples. For the low P/B value, it maybe also due to inflated asset value through optimistic asset appraisal or the market does not think that the assets are worth as much as appraised. Bargain hunters do watch out.

Based on the above 6 points, it does seems to show that Keppel REIT is not performing as well as the rest of its peers. Coupled with the concerns mentioned in the article with regards to supply glut and lease expiring in near term, performance may deteriorate even more and further limit Keppel REIT’s ability to distribute its income to shareholders. Share price pressure to weaken will be even stronger. This is one REIT that we personally would not like to touch. How about our readers? What are your views? Do let us know your thoughts.

The Valumetrics Team

————————————————————-

See the article below:

It has the highest leverage in the sector.

Analysts at RHB believe that Keppel REIT might be the most negatively impacted by Singapore’s looming office space glut, as the REIT faces major lease expiries in 2016.

Leases for over 567,000 sq ft of Keppel REIT’s net lettable area (NLA) are due to expire next year, amounting to about 16% of its NLA.

This is higher compared to peers like CapitaLand Commercial Trust and Suntec REIT, which face lease expiries comprising 10% and 15% of their portfolios, respectively.

“We maintain our pessimistic outlook on the office rental market as we have concerns over the c.4.3m sq ft office supply glut next year. As Keppel REIT could have among the biggest number of office leases expiring in 2016, we believe it would most likely be the most impacted compared to its peers,” RHB said.

In addition, Keppel REIT has the highest gearing ratio within the office SREITs sector.

“It is the most aggressively-leveraged player within the SREIT space. As of 3Q15, Keppel REIT is the one of the most aggressively-leveraged REITs within the SREIT sector. At a 42.6% gearing level, it is treading on the possibility of recording narrow margins from the maximum leverage ratio of 45.0%, which is expected to be implemented by the Monetary Authority of Singapore (MAS) by the beginning of 2017,” the report said.

‹ Valumetrics Comment: CapitaLand Mall Trust – A good blue chip name to buy

Impact of Interest Rate Rise on REIT Payout Ability ›

Tagged with: Investing, REIT, Singapore Stocks
Posted in Investment, Keppel REIT, REIT, Singapore, Singapore Stocks