Last Friday (25 October), I had the privilege of attending an insightful engagement session over a delicious lunch with the management teams of 4 Keppel REITs and business trusts-namely Keppel Infrastructure Trust, Keppel DC REIT, Keppel REIT, and Keppel Pacific Oak US REIT.

During the event, the management shared highlights from their recent business update for the 3rd quarter of FY2024, which concluded on 30 September. Beyond these updates, they took the time to address a range of questions we had, providing further insight into the performance and strategic directions of each REIT and business trust.

I am sincerely grateful to the Keppel team for organising this informative gathering. The session provided me with a comprehensive understanding of each entity, enhancing my perspective on their operations and outlook.

In this post, I have compiled the key takeaways from the session, which I hope will be useful to you in staying informed and up-to-date on these 4 Keppel-managed entities:

1. Keppel Infrastructure Trust (SGX: A7RU)

• The management’s investment focus centres on sustainable urbanisation, focusing on resilient, “evergreen” assets.
• Their strategy involves investing in essential service assets within developed markets. This approach, which proved resilient even during the Covid-19 pandemic, targets returns in the “low teens” range, and aims to generate a steady cashflow over time.
• Historically, the Trust has held assets for the long-term, or to maturity; however, in recent years, it has embraced asset recycling, allowing for profit realisation at optimal times and redeployment into better-performing assets.
• In terms of returns, Keppel Infrastructure Trust aims to deliver stable, sustainable yields, with distribution payouts gradually increasing by about 1% annually.
• One challenge faced is the frequent comparison of its metrics, such as debt profile, with those of REITs. The management emphasises that they are a business trust, not a REIT, which means there is no cap on gearing, and they are open to raising it to expand the Trust.
• A commonly asked question by unitholders was the business trust’s acquisition of Ventura Motors Pty Ltd, the leading provider of public bus services in Victoria, Ausralia. The management explained that this acquisition aligns with their decarbonisation theme, with plans to transition the entire bus fleet into electric vehicle over the next 20 years.
• The Trust's distributable income saw an 11.2% year-on-year decrease to S$124.0 million after adjusting for one-off items and timing differences for 9M FY2024 ended 30 September. This was due to S$20 million in growth capex. Management clarified that, had they fully funded this with debt, distributable income would have risen by approximately 5% but would also incur interest expenses, so they opted to use available cash instead.
• Finally, in terms of competition, the management shared that it is minimal due to the high entry barrier of investment costs.

2. Keppel DC REIT (SGX: AJBU)

• Management anticipates an average all-in borrowing cost of 3-3.3% for the year, given the easing of ECB interest rates.
• The REIT has a right of first refusal on S$2 billion worth of data centre properties from its Sponsor.
• For optimal returns, particularly for properties in Singapore and Ireland, the REIT maintains shorter lease terms to capitalise on potential positive rental reversions.
• Management addressed challenges with the REIT's tenant in China, noting that while the tenant isn't bankrupt, it is in a recovery phase and has been making small payments. Moving forward, management will continue to engage with the tenant to have them meet their monthly obligations, and at the same time, utilise incremental cash flow to top up.
• When asked why Keppel DC REIT has yet to enter the US market, management clarified that its Sponsor currently does not have data centre investments there, with additional considerations like tax implications and a high interest rate environment influencing the decision.
• Looking forward, management is optimistic about continued growth in data centre demand, driven by artificial intelligence and low supply. The REIT also aims to pursue acquisitions over the next 2-3 years, focusing on promising opportunities to drive growth.

3. Keppel REIT (SGX: K71U)

• The gearing ratio increased to 41.9% in Q3 FY2024, due to the acquisition of a Grade A property in Australia's city CBD, completed in May.
• Keppel REIT's management highlighted a positive rental reversion trend over the past 2 years, with strong valuations, particularly in its Singapore properties.
• The REIT remains focused on maintaining a robust balance sheet and prioritising capital and asset management.
• In Singapore, office properties continue to demonstrate strong performance with favourable rental reversions, and management anticipates further rental growth in the near future.
• Regarding Australia, management believes the office market may be nearing its lowest point, justifying their expanded exposure. Sydney, in particular, is experiencing a strong return-to-office trend. Additionally, extensive infrastructure upgrades in Sydney and Brisbane are expected to attract further interest in these office markets. In Australia, leases are typically longer with annual rental escalations, supported by incentives like rebates, which the REIT funds through capex.
• The North Asian office market remains robust, largely due to limited supply.
• To stabilise distribution payouts, Keppel REIT hedges its foreign currency 6 months before each distribution date.

4. Keppel Pacific Oak US REIT (SGX: CMOU)

• Management aims to maintain gearing at or below 40% and is focused on properties in markets with strong job creation, population growth, and GDP growth.
• On the state of the US office market, management noted a healthy leasing momentum, with a strong 4th quarter thus far.
• The primary reason for pausing distribution payouts was to preserve liquidity; however, management clarified there are no plans for asset sales solely to improve liquidity. They updated the REIT is on track to resume distributions in 1H FY2026.
• While an earlier resumption of distribution payouts (potentially in FY2025) is possible, it largely hinges on the annual valuation of its properties and the REIT's gearing level.
• Property valuations are expected to decline again this year, although management does not anticipate a significant drop. They are optimistic that valuations will improve by 2026, which would support lower gearing and allow room for the resumption of distribution payouts to unitholders.

Closing Thoughts

Attending sessions like this is something I truly value, as they provide a unique opportunity to raise and discuss the concerns we retail investors often hold directly with management. These sessions also allow us to gain firsthand insight into the strategic thinking and meticulous planning that goes into sustaining growth and delivering value to us as unitholders.

During this 2.5-hour engagement with the management teams of the 4 Keppel-managed REITs and business trusts, I gained a deeper understanding of their approach to navigating current challenges while also positioning for future growth. The candid responses and detailed explanations offered by the management clarified how they are tackling headwinds, from market fluctuations to operational adjustments, all while remaining focused on creating long-term value.

A heartfelt thank you to Keppel for extending this invitation to me, and I look forward to attending the next one!

Disclaimer: At the time of writing, I am not a unitholder of any of the REITs and business trusts.

The post What I Learned from the Engagement Session with Keppel's REITs and Business Trust Management first appeared on The Singaporean Investor.