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Keppel REIT is a commercial REIT that owns nine premium grade/Grade A office buildings located in Singapore and Australia. Its Singapore properties include Ocean Financial Centre, Marina Bay Financial Centre, One Raffles Quay, and Bugis Junction Towers. Since its IPO in 2006, Keppel REIT has grown its assets under management (AUM) from $600 million to over $8.5 billion as at 31 March 2018 — a growth of over fourteenfold!
While its asset growth has certainly been impressive, Keppel REIT’s distribution per unit (DPU) has been falling steadily over the last few years, much to the disappointment of its unitholders, many of whom invest for passive dividend income.
Source: Keppel REIT
So I attended Keppel REIT’s most recent annual meeting to find out more about its past year’s performance and to learn how the management plans to reverse the REIT’s falling DPU.
Here are eight things I learned from the 2018 Keppel REIT AGM:
1. Distributable income fell 8.4% year-on-year to $190.7 million and DPU fell 10.5% to 5.7 cents. This was mainly due to lower rental support, lower one-off income received, and the absence of other gains distribution. Based on 2017 DPU and Keppel REIT’s closing price of $1.16 as at 4 June 2018, its distribution yield is 4.9%.
2. Portfolio committed occupancy rate is 99.7% as at 31 December 2017, which is well above the market average in Singapore and Australia. Keppel REIT achieved a high tenant retention rate of 95% in 2017 and its weighted average lease expiry is 5.5 years.
Source: Keppel REIT
3. Gearing ratio is 38.7% as at 31 December 2017. Average term to maturity is 3.4 years and cost of debt is 2.62%. Seventy-seven percent of borrowings are at fixed interest rates. Keppel REIT has already completed its refinancing requirements for 2018 and have no more loans due this year.
4. In July 2017, Keppel REIT acquired a 50% stake in 311 Spencer Street for A$347.8 million (~$368 million). The Melbourne property is currently under construction and is expected to be ready by end-2019. When completed, the property will be fully leased for 30 years and serve as the headquarters of the Victoria Police. The acquisition is expected to be yield accretive, generating a property yield of 6.4%.
5. A unitholder noted the REIT’s falling DPU and voiced his frustration that the management seemed to be focused on expanding the portfolio instead of growing distributions. Chairman Penny Goh explained that office rents in Singapore have been facing downward pressure the last few years due to an oversupply and Keppel REIT requires time for the performance of its properties to catch up. The REIT is also a pure office play and doesn’t have the benefit of owning other property types (e.g. retail) to mitigate a downturn in the office sector. She assured unitholders that the management would not acquire assets simply for the sake of doing so, but emphasized how their acquisitions have, over the years, transformed Keppel REIT’s portfolio from one that owned older non-core central business district (CBD) assets into one that now largely owns premium Grade A assets located in the heart of the CBD. To back the chairman’s point, CEO Tan Swee Yiow highlighted 311 Spencer Street as an example of a high-quality acquisition with a long lease that would improve the yield and WALE of the overall portfolio.
6. Another disgruntled unitholder argued that owning expensive, premium assets was pointless because a high valuation is something ‘he can see but cannot get’, and a growing DPU is still what matters at the end. The chairman assured the unitholder that the management is taking the issue seriously and is doing its best to improve the performance and operational efficiency of the portfolio. She reiterated that the Singapore office sector is only now recovering from the bottom of a cycle and that Keppel REIT requires time to capture the uplift and positive rental reversions.
7. A unitholder pointed out the issue of declining DPU had been brought up before at previous AGMs, and the problem would remain unless the management fee structure is changed, because the management is mainly incentivised to grow asset values. (Keppel REIT’s management earns an annual base fee of 0.5% of AUM and an annual performance fee of 3.0% of net property income.) The chairman replied that the fee structure is not out of line in the market and there are other REITs with similar fees. She added that the fees have been the same since IPO and is transparent to all unitholders. The board had also reviewed the fee structure and decided that it was appropriate and should remain.
8. Another unitholder took a different view and highlighted a comparable office REIT, CapitaLand Commercial Trust, that has an annual base fee of 0.1% of AUM and an annual performance fee of 5.25% of net property income. He said that Keppel REIT’s current fee structure doesn’t incentivise the management to ‘work harder’ as the bulk of its fees are earned from base fees. He added that unhappy unitholders could vote down future acquisitions (which would increase the AUM further) and affect the REIT’s growth. The chairman restated her point that other REITs have a similar fee structure and added that the base fee incentivises the management to upkeep the quality of the properties to maintain asset values, which is to the benefit of unitholders as well.
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