Keppel REIT needs no introduction.
This Singapore REIT is one of the biggest office landlords with a market cap of S$3.9 billion.
It owns and manages 11 office buildings across Singapore, Australia and Korea.
If you ask me, what I like about Keppel REIT is all of its properties are in prime grade-A office location, or largely CBD area.
In Singapore, it owns some of CBD’s most iconic buildings including Ocean Financial Centre, Marina Bay Financial Centre, One Raffles Quay and Keppel Bay Tower.
It recently bought Keppel Bay Tower near Harbourfront.
These high grade office buildings have the power to attract big MNCs, whether there’s a crisis or not.
In fact, during the last quarter of 2020, more than half of Keppel REIT’s non-renewed spaces have since been renewed.
These new tenants come from the financial, property and technology sectors.
So far, Keppel REIT’s overall occupancy rate is around 98%, which reflects MNC demand for prestigious CBD locations.
In my opinion, this Singapore REIT is one of the more resilient office landlords.
But that’s not the full story told.
Why Keppel REIT’s Dividends Keep Falling?
You see, in 2008, Keppel REIT’s parent, Keppel Corp started providing huge “rental support” to Keppel REIT, in order to give a boost to Keppel REIT’s gross rental income.
But more importantly, Keppel REIT wanted to maintain the high valuation of its office buildings.
This is because office spaces in the CBD area is highly competitive, even though there’s huge demand for these offices.
Now, rental support simply means Keppel Corp guarantees a fixed amount of rental income to Keppel REIT every year.
In other words, even if Keppel REIT can’t lease out all of its office spaces, Keppel REIT gets to keep a guaranteed rent income from its parent.
And unitholders get to collect dividends, as if the office buildings are fully occupied.
As a long term dividend investor, I want to know where my dividends are truly coming from.
The fact is, Keppel REIT’s rental support grew from S$25 million in 2008 and at one point in 2012, hit S$86 million (shown in financial statement below).
Then, Keppel REIT’s rental support dropped all the way to S$2.7 million in 2019.
Source: Keppel REIT’s Annual Report 2012
Now, because of this rental support, Keppel REIT was able to reward unitholders with growing dividends year after year, until a few years back.
And the problem comes once the rental support is gone.
If you think about it, that’s sort of “inflating” the distribution per unit (DPU) Keppel REIT offers to investors.
Because once the rental support drops, the distribution per unit (DPU) drops.
DPU is a simple measure to see how much dividends a unitholder receives for every share of the REIT owned.
The Fifth Person has a great chart showing Keppel REIT’s falling DPU. You know, I like their stuff because of the factual, up-to-date information they provide and they even cover companies’ AGM. But what I usually find lacking is, they don’t say their opinions enough.
Anyway, in this case, Keppel REIT’s huge fall in DPU wasn’t just a competitive office space, but the absence of rental support.
Keppel REIT’s Shares Are “Like a Bond”
I’m not saying Keppel REIT is a bad REIT.
I like the quality of its properties, but you’ve to be careful when a REIT relies heavily on rental support.
Here’s the other thing, rental support is actually a common thing in Singapore REITs.
That’s why many Singapore REITs, like Keppel REIT’s shares have always traded “range bound”.
The market knows — once rental support ends, Keppel REIT must make up for the shortfall of rental income, otherwise the value of its properties will fall.
Over the past five years, Keppel REIT’s shares have ranged between S$0.95 to S$1.29.
Even during the Covid-19 pandemic last year, the lowest it went was S$0.95 before recovering to S$1.15.
The market also knows it’s hard for Keppel REIT’s properties to rise in its value.
Source: Yahoo! Finance
And the rental support is what gives Keppel REIT’s high property valuation.
The rental support, in my opinion, is also why the market is not giving Keppel REIT’s properties their true valuation.
Or in other words, the Keppel REIT’s shares are always trading at a discount to its book value.
You might think that buying Keppel REIT is cheap, when it’s not.
Having said that, Keppel REIT is still a high quality office REIT in Singapore.
In its latest financial results ending Dec 2020, Keppel REIT’s property income (revenue) grew 3.8% to S$170 million.
This came from new contributions from T Tower and Victoria Police Centre, during the Covid-19 pandemic outbreak.
The question here is, can Keppel REIT continue to grow its DPU?
Well, for me, I see Keppel REIT as a bond, not because of its dividends, but its shares doesn’t bounce around often.
And if you ask me if I’m buying Keppel REIT, I’ll first make sure even without the rental support, if it can even maintain its DPU.
Especially in a highly competitive office space.
You can also check out my best 8 Singapore REITs Guide here.
To good investing,
Willie Keng, CFA
Founder, Dividend Titan
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