KEPPEL Reit : K71U -0.56% posted a distributable income from operations of S$50.2 million for its first quarter ended Mar 31, 2023, down 6.7 per cent from S$53.8 million in the same period a year earlier.

 

This was mainly due to higher borrowing costs, the Reit&rsquo s manager said in a business update on Wednesday (Apr 19).

 

However, the Reit will also be distributing an anniversary distribution of S$5 million for the quarter, in celebration of its 20th anniversary in 2026. The manager earlier announced that the Reit would distribute a total of S$100 million of the anniversary distribution over a five-year period.

 

This brings the Reit&rsquo s total distributable income for the quarter to S$55.2 million, up 2.6 per cent from the year-ago period.

 

Property income was up 5.9 per cent to S$57.7 million for the quarter, from S$54.5 million the year before.

 

Net property income (NPI) attributable to unitholders grew 1.3 per cent on year to S$40.5 million, from S$40 million a year earlier.

 

The Reit recorded higher NPI for the majority of its properties in the quarter, due to higher rentals achieved on leases committed in 2022 as well as a higher portfolio occupancy, its manager said.

 

Keppel Reit&rsquo s portfolio committed occupancy stood at 96.3 per cent, and its portfolio weighted average lease expiry stood at 5.8 years as at Mar 31.

 

Its aggregate leverage was 38.7 per cent, with no major refinancing requirements in 2023.

 

There were 13 primary-listed companies conducting share buybacks over the five trading sessions through to Mar 30, with a total consideration of S$10.0 million, down from S$32.4 million for the preceding week. OCBC again bought back 400,000 shares over the five sessions, with the average price paid at S$12.47.

 

On Mar 24, Keppel Reit Management bought back one million units of Keppel Reit : K71U +1.72% at an average price S$0.868 per unit.

 

Digital Core Reit Management also bought back 130,000 units of Digital Core Reit : DCRU +1.14% at US$0.425 per unit on Mar 28, and 225,000 units at US$0.423 per unit on Mar 27.

 

Director and substantial shareholder transactions

The five trading sessions saw more than 70 changes to director interests and substantial shareholdings filed for close to 30 primary-listed stocks.

 

This included 20 company director acquisitions with one disposal filed, while substantial shareholders filed 11 acquisitions and 11 disposals.

KEPPEL Real Estate Investment Trust : K71U +0.52% (K-Reit) last Friday (Jan 27) declared a distribution per unit (DPU) of S$0.0295 for the second half of financial year 2022, up from S$0.0288 in the year-ago period.

 

Stripping out the anniversary distribution of S$0.0027, the DPU for H2 FY2022 would have been S$0.0268. That is 5.3 per cent lower than FY2021&rsquo s DPU of S$0.0283 after stripping out the padding of a capital gains distribution of S$0.0005 a unit or S$2 million.

 

The capital gains distribution for 2021 arose from past divestments of assets. K-Reit, which is the only pure-play office Reit in Singapore, has made such distributions of varying amounts in the past. It paid out an additional S$10 million in 2020 and S$3 million in 2018, for instance.

 

The chief financial officer of K-Reit&rsquo s manager had said at the FY2021 financial results briefing that the Reit would assess the level of capital gains required to stabilise the distribution in future.

 

New for K-Reit, however, is the anniversary distribution of S$100 million to celebrate its 20th anniversary in 2026. The distribution, described as &ldquo an appreciation to unitholders for their support&rdquo , will also come out of accumulated capital gains. K-Reit will distribute S$10 million semi-annually over five years, it announced in its third-quarter business update last October.

 

Analysts have put K-Reit&rsquo s undistributed capital gains at over S$400 million.

 

At first blush, unitholders should be happy about the &ldquo windfall&rdquo . That was how a DBS analyst described it, adding that it is &ldquo a bold move that will be well received by shareholders&rdquo .

 

The report said: &ldquo We believe this is a bold, and rare, move from management to reward and share its years of gains accumulated from its asset recycling strategy with shareholders, especially in such a challenging environment. We believe this is a strong testament from management that it is exercising duty of care and loyalty to all stakeholders who have been supportive of the company.&rdquo

 

Nevertheless, the anniversary distribution raises some questions. Why call it an anniversary distribution when the anniversary is not till 2026? Is K-Reit expecting a tough few years, and therefore hoping to smooth out its DPU? Also, why call special attention to this distribution when K-Reit has been regularly distributing capital gains for some years? And, why isn&rsquo t it par for the course for Reits to regularly return capital gains to their unitholders?

 

Responding to questions from The Business Times, a K-Reit spokesperson reiterated the intention to reward unitholders with the anniversary distribution as it focuses on &ldquo delivering sustainable total returns&rdquo to its unitholders. Proceeds from asset divestments may be redeployed to fund growth through reinvestments, distributed as capital gains, or used to pare down debt, the spokesperson added.

 

Undoubtedly, unitholders will appreciate the extra cash. Yet, the distribution isn&rsquo t being paid out of spare cash. Rather, it will be funded by debt &ndash surprising given that interest rates are rising. K-Reit had total gross borrowings of S$2.9 billion as of end-December 2022, up from S$2.7 billion a year earlier. Its aggregate leverage was unchanged at 38.4 per cent, while the all-in interest rate rose by 31 basis points.

 

This begs the question: Shouldn&rsquo t any surplus be distributed promptly as capital gains are realised, rather than keeping the gains on the books as cookie jar reserves to stabilise distributions when deemed fit by the manager?

 

K-Reit isn&rsquo t the only Reit that has not distributed capital gains. CapitaLand Ascott Trust : HMN -1.8%, formerly known as Ascott Residence Trust, disclosed in January 2022 that it had about S$300 million in undistributed capital gains. The lodging trust said the capital gains showed it has recycled well, invested well, and realised gains that can be distributed to its unitholders during a period when income is hit.

 

This practice is also common in the fund management industry, where excess gains are used to smooth out income over the life of a fund.

 

A Reit, however, has different attributes from a fund. Reit managers should consider if that is the preference of unitholders, especially since money has time value and unitholders might also be able to reap a higher yield elsewhere with the distribution.