Monday, July 22, 2013

Journey To Retirement Part 11 -- Kep REIT

The eleventh part of my investment portfolio in which objective is to create wealth to retire.

Stock : Kep REIT
Kep REIT, previously known as K-REIT Asia (changed of name from 18th October 2012) was listed in SGX by way of an introduction on April 2006 as a REIT.  It is an office sector REIT, sponsored by Keppel Land Ltd and has the first right of refusal to Keppel Land developed office buildings.  Some of its known assets at the moment are Ocean Financial Centre, One Raffles Quay, Prudential Tower, Marina Bay Financial Centre Towers 1 & 2, Bugis Junction Towers, etc and also 275 George Street in Brisbane, Australia.  Most of its assets are centralized in the CBD area thereby making them mostly Grade A assets, which can demand higher rental income from tenants in general.

Acquired Kep REIT in 2013 through the partial divestment from Kep Corp to its shareholders.  As a result, it was like a "free gift" without any cost.  Current status is considered as "floating profit".  In its latest 1H2013 earning dated 15th July 2013, it has achieved an annualized DPU of 7.95 cents (translating to 6.12% yield with respect to S$1.30 price level as of 19th July 2013) and a NAV of S$1.22.  As a REIT, it is classified under "income stock" in my investment portfolio.  Due to the nature that it was an entitlement from Kep Corp shareholders, the quantity at the moment is bare minimum (for every 1000 share of Kep Corp entitled to 200 share of Kep REIT) and in Kep Corp latest earning, it continued to divest Kep REIT to its shareholders (for every 1000 share of Kep Corp entitles to 80 share of Kep REIT).  This no doubt has given good opportunity to collect more Kep REIT without really putting up capital for it.  The "free gift" from Kep Corp has no doubt a starting step to slowly invest in Kep REIT.  In the period of recession, that should be the best period to finally put in some cash to invest in it.    

Potential Upside :
The potential upside for Kep REIT is the increase in distribution and capital appreciation down the road.  As most of its assets are in CDB area, should there is a short in supply of office space, the rental in CDB area will be able to demand a premium which could drive up Kep REIT revenue.  Primarily, a typical yield for office sector would be around the 5.5% to 6.5% level under normal condition and with current distribution yield of only 6.12%, this has provided some capital upside at the moment.  Another plus point for Kep REIT is the first of right of refusal from Kepland in acquiring further office assets and that condition has ensured Kep REIT can have a good pipeline of good quality assets to acquire in the future.

Potential Downside :
Potential downside is no doubt due to the cyclical nature in office space demand.  In a recessionary situation in which companies downside, cut cost or relocate the demand of Kep REIT's office space or the rental income will be affected and this is when the stock price of Kep REIT can fall, as in the case in 2010 in which the stock price has dropped below $1.  Further than that, the distribution will be affected due to lower revenue in which a distribution yield of around 4.5% is possible.

Personal Expectation :
As a fixed-income entity and "income stock", the minimum expectation for Kep REIT  is to maintain at least $0.01 DPU per quarter even in the worst case of recession.  The secondary expectation is the management the ability to bring in more yield-accretive assets locally or overseas to boost its assets portfolio.  By doing so, this apart from providing unitholders with good distribution yield, it also enable capital appreciation on the stock price.


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