Why I Would NOT Invest in Keppel REIT and Stick to US Office REIT

 Keppel REIT has announced its full year results

There are a few danger signs shown in the REIT's latest full year financials and in addition, its share price I feel is at a high. Hence I feel it is not worth owning Keppel Office REIT and I do feel REITs outside of Singapore such as Elite UK and Prime US are of a better deal (coincidentally, Keppel has a stake in PRIME US REIT)

Summary of Keppel REIT Financial Results

Before I delve deeper, below are the results/summary of Keppel Singapore Results:

• Dividend of 5.6 cents (decrease of 3.4%), yield is 6.3%, 
• Dividend funded by SG$20 million from anniversary distribution (capital gains), 100% payout ratio
• NAV of $1.24
• Leverage grew to 41.2%
• All in interest cost of 3.4%

All in all, while Net Property Income has grown, the higher interest cost has ate into K Reit's distributable income. DPU has decreased and my main worry is how its high dividend are been sustained by growth in borrowings.......

High Yield But Its by The Ad Hoc Anniversary Declaration

As seen in slide 6, 9.3% of K REITS dividend is outside of its 100% payout ratio. It is funded by a 20 mil Anniversary Distribution. This means the REIT has been borrowing more in order to fund its dividend. This is not sustainable

If anyone remembers history, it is similar to what happened to Keppel Pacific/PRIME US/Manulife US, these REITs were paying 100% in payout ratio and doing CAPEX by increasing its leverage. Keppel REIT is doing the same now, ironically 2 out of these 3 REITs were part of the Keppel family group.

To add icing to the cake, it is growing its leverage by paying more than 100% payout to finance its 5.6 cents dividend. This is not right. Its real sustainable dividend is only 5 cents.

Cap Rate Used by Keppel's Valuer Are Too Optimistic

Stop of saying fraud, I notice Keppel's valuer are using cap rates of 3.15% to 3.55% for its Singapore Office Properties. That is too close a margin to cut. Any mishaps in the Singapore Office property space and cap rates will have to be adjusted upwards. It leads to the cascading effects of lower valuations and in turn the risk of breaching MAS's leverage limit. 

Why US Office REITs in SGX

Simple, the US Office REITs of KORE and PRIME have lived through a storm and are still alive with re financing. In terms of capital returns + dividend, should US Office SGX REITs resume their dividend payout, they are likely to best Keppel Singapore REIT in capital + dividend gains.

I am willing to bet on it. Given the risk reward ratio, overseas office REITs are going to be a better investment vehicle than Singapore's office REITs.