Sunday, January 17, 2016

Keppel REIT Divests Property ABOVE Book Value

This is the recent news about Keppel REIT, where they have divested an Australian property for 27% above the recorded book value.

This is 40% higher than their purchase price done in end 2010, which means they made handsome capital gains of 40% in a short span of 5+ years. That translates to capital gains of 6% per year, and adding in the rental income, it should be quite a handsome investment for the REIT.

Sure, this property is a tiny $160 mil AUD, which is small compared to the portfolio book valuation of $4,400 mil SGD. However, it does give me a lot more confidence of their property valuation that is on their books. Imagine, what if the whole REIT itself was "worth" 27% more than its book value?

Based on the last quarters data, their NAV is $1.37 (of course, the new quarter data is coming out soon and I would reckon would be revised lower). Yet, the stock price is trading at a huge discount to NAV at $0.90. This is a discount to book value of 34%! Keppel REIT is trading at 66% of its book value.!

If Keppel REIT was to trade at a 27% premium of its book value, that would imply an almost 90% gain in it's stock price!

Of course, that is rather unlikely. Not that its property isn't worth a premium to its book value or not, but rather I doubt anyone would be coming in to buy out their portfolio.

The thing I like about Keppel REIT is that 70% of their leases are not due for renewal until 2018, and I personally think that there will be a shit storm is the coming year or 2 which would adversely affect the economy. Have leases expiry only from 2018 is a good thing in my opinion.

I did see TI's recent post bringing up the REIT managers fee and I'm quite shocked about the 24% fee as of revenue. Anyway, I need to investigate into this further, but at least to me for now, Keppel REIT is an asset play.

I've mentioned before that Keppel REIT is one of my top picks if it came down to REITs. I care very little about "interest rates" when it comes to thinking about REITs. Yes, in the short-term they are affected by these little shifts. In the long term, I would be pretty amazed if you can show me a correlation. REITs and bonds (which are inversely related to interest rates) have an almost perfectly zero relationship.

Personally, I HATE buying REITs at a premium over valuation. One of my main takeaways from the REIT bible is that you should never ever ever buy a REIT at a premium over valuation unless you can strongly justify it. Basically, it is almost always "safer" to buy a REIT below valuation than above. Book value isn't the only metric in the word, but I would like to stress and emphasize my preference for using this metric when it comes to REITs. With P/NAV as my anchoring metric, followed by other things that I look it, this framework has served me rather well with my REIT investments, steering me clear from the obviously retardedly overvalued REITs. (IREIT at 17% premium over NAV? Hello? Common sense to brain, do you read me, over?)

Although I only have a paltry 200 shares in Keppel REIT directly, I do own Keppel Corp, which owns 45% of Keppel REIT. I am thinking about increasing my position in Keppel REIT.

1 comment:

  1. Hi GMGH,

    what is important to note is Keppel REIT's two gems, MBFC and OFC have income support till 2018/2017 promised by Kepland, who coincidentally is the REIT manager. The rental support for MBFC is approx $10.80 psf/month (any rent lower Keppel Land will top up).

    Once these income supports expire after 2018, will K Reit assets still be valued as valuable according to valuations? Currently office rental rates are at $10.40 and declining

    ReplyDelete

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