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Why Keppel REIT Just Went All In On Australian Retail In FY2025 · Investor Exchange

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Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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Welcome back to another deep dive. So I want to start today with a bit of a
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riddle. Oh, I like riddles.
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It's actually a pretty frustrating one if you're an investor. So here it is.
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How can a company own billions of dollars in real estate, collect more rent
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than ever, and yet pay out less money to you, the shareholder?
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Ah, sounds like a trick question, doesn't it? Or just bad math.
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It feels like bad math. I was looking online and you can see people just scratching
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their heads. They see the headline, you know, record income.
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They get excited. And then the distribution notice arrives.
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Exactly. And it's lighter than last year's. It is the classic good news, bad news scenario.
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It really is. And that's the core tension in Keppel Reit's fiscal year 2025 results.
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They just released the full report last week, February 4th. So our job today
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is to kind of play detective. We need to figure out where that money went,
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why the payout dropped, and whether this is a sign of trouble or just them changing course. Right.
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For anyone new to this, can you give us the like 10 second version of Keppel-Reid? Who are they? Sure.
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So Keppel-Reid is a real estate investment trust. Right.
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Put simply, they're a giant landlord. A very fancy landlord. A very fancy one, yeah.
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They own premium grade A commercial buildings. We're talking shiny glass towers
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in Singapore, Australia, South Korea.
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Right, the ones in the financial district with the amazing air conditioning
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and the $10 coffees in the lobby.
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Those are the ones. And the deal with the Reed is usually simple.
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They collect rent, they pay the bills, and then they pass almost all the leftover profit to you.
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Which brings us right back to the drama in 2025.
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Because we have this record income, a really weird plot twist with a shopping mall.
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We definitely need to talk about the mall. We do. And some debt numbers that
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at first glance look honestly terrifying.
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I think management would probably call it a transformational year.
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But yeah, drama works too.
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It was repositioning. They basically took a few short-term hits for what they
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hope is a much stronger long-term gain.
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Okay, let's start with the good news then before we get to the painful part. The top line.
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The revenue. The business itself seems to be running really well,
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right? Oh, operationally, the numbers are genuinely strong.
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Property income hit 274.5 million. Which is up, what, almost 5%?
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Up 4.9%. But the number I really focus on is net property income, or NPI.
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Okay, break that down for us. What's the difference? So property income is just
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all the cash coming in the door.
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NPI is what's left after you pay for, you know, property taxes,
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maintenance, security. The cost of running the building. Exactly.
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And that number, the MPI, grew even faster. It was up 6.9% to $215.9 million. Wow. Okay.
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Almost 7% growth in actual profit from the properties. That's really solid.
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Where did that come from? Did they just hike the rent on everybody?
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That's a piece of it, for sure. But it was mostly driven by their new assets.
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If you remember back in May 2024, they bought a stake in 255 George Street in Sydney.
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Vaguely, yeah. Well, 2025 was the first year they got a full 12 months of rent
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from that building. They gave the numbers a big boost.
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But it wasn't just that. They also managed to squeeze more out of their existing properties.
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Like where? Like at 2 Blue Street, also in Sydney. They just filled up more
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of the empty offices, so occupancy rose.
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And here in Singapore, rents are just...
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Well, they're strong across the board. So the engine is running great.
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The buildings are printing money, which brings me to the part that really stings. Yo.
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The distribution per unit. If the buildings are making more money,
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why is my slice of the pie getting smaller?
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It dropped to 5.23 cents. That's down 6.6%. Right.
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And for an income investor, you know, someone who relies on that check, a 6.6% pay cut is.
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It's a big deal. It's a huge deal. So explain this to me like I'm five.
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Where did the money go? Okay. We have to talk about something called dilution.
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Let's use a pizza analogy. I am always here for a pizza analogy.
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Imagine you and I, we order a pizza. It's cut into four huge slices.
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We each get two. Great. I'm with you so far. But then we decide,
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hey, next year, let's throw a bigger party.
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We want to buy more snacks, maybe a second pizza.
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But we don't have the cash on us. So we invite two more friends to the table to chip in some money.
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Okay, so now there are four of us. Correct. But the second pizza hasn't arrived yet.
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So for right now, we had to split that original pizza four ways instead of just two.
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Ah, my slice just got way smaller. Way smaller.
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The friends are the new investors.
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Keppel Reid issued new shares to raise cash late in the year.
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So the number of slices, the unit base, it just got a lot bigger.
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But wait, don't the new buildings they bought with that money come with their
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own rent checks? Isn't that the second pizza? It is. But the delivery driver
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was really, really late.
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This is the key. Yeah. The timing mismatch. Okay.
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They issued the new shares late in 2025, so the dilution happened right away.
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But look at when they actually bought the new assets. They completed the Top
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Ride Shopping Center purchase on December 19th. Pretty late in the year.
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And they bought the extra steak at Marina Bay Financial Center Tower 3 on December 31st.
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December 31st, the absolute last day of the year. The very last day.
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So they had more mouths to feed for the last part of the year,
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but the giant new income stream only really existed for, what, one day? Precisely.
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You took all the pain of the smaller slice in 2025.
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But the benefit, the second pizza, doesn't really show up on your plate until
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2026. That is frustratingly logical.
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It makes sense, but it still hurts.
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I also saw something in the fine print about management fees.
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Something about them switching from taking units to taking cash. Is that part of this?
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It's very relevant, actually. So in the past, the REIT manager would take their
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fee in the form of new units.
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So they got paid in shares of the company. Right.
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Which saves cash, but it's also a slow drip dilution.
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It's like the pizza is constantly getting sliced just a little bit thinner every
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single year. A silent killer. Exactly.
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But this year, they changed the policy. Now they're taking 25% of their fee
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in cash. Why do that? It's a signal to the market.
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They're basically saying, we know the unit price is low and we don't want to dilute you any further.
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Taking cash actually reduces the distributable income by a couple million dollars,
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but it protects the value of the shares you already own. It's a shareholder-friendly move.
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Okay, that actually is good to know. It feels like they're trying to build a
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floor under the price. So let's talk about what they bought with all that money.
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More of MBFC Tower 3. I get that.
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Doubling down on your core market. Right. It's boring, stable,
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safe Singapore office space.
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It increases their Singapore exposure to nearly 80%.
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It's a flight to quality. But
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Fortress Asset. But then they did something that made me do a double take.
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They bought a mall, Top Ride City Shopping Center in Sydney. Yes, a 75% stake. A mall.
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I thought the whole narrative for the last five years was retail is dead.
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You know, e-commerce, Amazon is king. Why on earth is an office landlord suddenly
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buying a shopping mall? It is definitely a pivot.
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And it's their very first pure play retail investment. But you have to look closer.
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The death of the mall idea is a very American story. Things are a bit different in Australia. How so?
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Well, first, the data they cited shows Australian household spending was up over 6% in late 2025.
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The consumer is still spending. But more importantly, look at what kind of mall
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this is. Yeah. It's not a luxury fashion destination.
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So like supermarkets and pharmacies. Exactly.
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Supermarkets, services, cinemas. It's a suburban community hub.
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People go there because they need to, not just to browse. And it sits on valuable
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freehold land. The strategy here is all about diversification.
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Right, not putting all your eggs in the office basket. Precisely.
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There's still a lingering fear about the future of office work.
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So by buying a defensive, needs-based mall, they're smoothing out their income.
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If the office market has a tough year, maybe the mall has a good one.
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I see the logic. It's a hedge.
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But since you mentioned the fear of hybrid work, how are their actual offices
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doing? Are the desks full?
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The numbers suggest they are. We need to look at a metric called rental reversion.
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And that's just the difference between the old rent on an expired lease and
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the new rent they signed for, right? Correct. If the market was dead,
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that number would be negative. You'd be offering discounts.
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But Keppel REIT reported a positive rental reversion of plus 11.5%. Wait, what?
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Plus 11.5 percent. That's huge. So new tenants are paying over 11 percent more
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than the old ones were. Yes.
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That is the ultimate proof of pricing power. It shows the demand for their specific
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high quality buildings is incredibly strong.
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What about overall occupancy?
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Portfolio committed occupancy is 96.7 percent. That sounds really high. It's incredibly high.
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In some U.S. cities, office vacancy is, what, 20, 30 percent?
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Keppel is sitting at less than 4 percent empty. it's a real flight to quality.
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Companies might be shrinking their overall footprint, but the space they keep
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has to be the best. Who are these tenants, though?
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It's a very boring list, which is exactly what you want as an investor.
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Almost 40% of new demand came from banking and finance, another 25% from tech and media.
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These are blue-chip, stable tenants who aren't going anywhere.
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Okay, so the buildings are full, tenants are paying more, but we have to talk
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about the balance sheet.
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I was flipping through their slides, and I saw a number that made my heart skip a beat.
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Aggregate leverage, 47.9%. Yes, the leverage ratio.
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For anyone listening, the regulatory limit for Singapore REITs is usually 50%.
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47.9 feels like you're standing on the edge of a cliff. If you just look at
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that headline number, it is terrifying. I agree.
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But this is where you have to read the footnotes. I call it the snapshot defense.
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A snapshot defense. Explain that. That 47.9% number was the leverage on one
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specific day, December 31st, 2025.
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Ah, the day they bought the new building. Exactly. To close those deals quickly,
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they used short-term debt called equity bridge loans.
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It's like putting a massive purchase on your credit card because you know your
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bonus is clearing in two weeks.
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So the debt was on the books, but the cash from the new investors hadn't landed yet. Precisely.
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The report clearly states that by January 20th, less than three weeks later,
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they got the cash for investors and paid off those bridge loans.
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So what's the real number, the adjusted leverage?
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The adjusted pro forma leverage is 40.4 percent. Oh, OK. 40.4 percent is.
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Completely normal. It's very healthy. But yeah, if you just saw that one chart,
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without context, you'd think there was a crisis.
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It was just a temporary accounting blip. That's a huge relief.
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But speaking of debt, how are they handling the higher interest rate environment?
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Their average cost of debt is 3.41%. In this climate, that seems pretty good. It's very solid.
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And crucially, 62% of their debt is on fixed rates, which protects them from any future rate hikes.
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Okay, let's look forward then. 2025 was the weird, confusing year.
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What does 2026 look like? The theme for 2026 is full contribution.
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Remember the pizza analogy? Delete delivery.
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Well, the second pizza has arrived. In 2026, they get a full 12 months of income
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from the Top Ride Mall and from their bigger stake in MBFC Tower 3.
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So the dilution pain is in the past and now the income gain begins. That's the plan.
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Yeah. The income base is just fundamentally larger now. One thing I see on all
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these reports is ESG. They talk about net zero and Greenmark Platinum ratings.
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Is this just, you know, marketing fluff or does it actually help my investment?
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In commercial real estate, it absolutely matters for returns.
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They mentioned MBSE Tower 3 got this BCA Greenmark Platinum Super Low Energy certification.
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That's a mouthful. It is. But think about what it means.
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Super low energy means lower utility bills, so higher profit margins.
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More importantly, think about those blue-chip tenants we talked about.
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The big banks and tech firms. Exactly.
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Yeah. They all have their own ESG mandates. They promise their shareholders they'll be net zero.
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They literally are not allowed to sign a lease in a building that isn't green certified.
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So having the best green rating isn't about saving the planet.
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It's about making sure the richest tenants are allowed to rent from you.
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It's a competitive moat. It's tenant retention.
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Older, inefficient brown buildings are going to become a real liability.
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Okay, so we've explained away a lot of the scary stuff, but let's play devil's advocate.
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What could still go wrong in 2026? What are the biggest risks?
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I'd say there are two main ones. First is currency risk. Because they own assets overseas.
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Right. They collect rent in Australian dollars, Korean one, but they report
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and pay dividends in Singapore dollars.
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In 2025, the Singh dollar was very strong, which meant all that foreign rent
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was worth less when they brought it home.
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If that trend continues, it's a headwind. And the second risk.
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It's still interest rates.
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Yes, their current cost of debt is low, but they have loans that need to be
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refinanced the next couple of years.
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If rates stay higher for longer, those new loans will be more expensive and
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that eats directly into profits.
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So we're not totally out of the woods, but the path looks a lot clearer.
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The way I'd summarize come 25.
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Yeah. It was like a runner stopping mid-race to tie their shoes.
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How so? Well, if your shoe comes untied, you have to stop. Your pace drops for a minute.
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To the spectators, the investors, it just looks like you're slowing down. That was the DP drop.
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But if you don't stop, you'd trip and fall later. Exactly.
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They stopped. They tied their shoes tight by buying the new assets and fixing
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the balance sheet. And now they're ready to sprint again in 2026.
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That's a great way to put it. And I think the big provocative question I'm left with is about that mall.
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Is this a one-off thing? Or is Keppel Reitz signaling that the golden age of
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the pure office landlord is over? It's a fascinating question. Thank you.
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The line between where we work, live, and shop is blurring. Yeah.
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Maybe our real estate portfolios need to blur a little bit, too.
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Well, I feel a lot better about those results now. We've gone from bad math to a strategic pause.
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Knowledge is power. Thanks for breaking it all down for us. That wraps up our
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deep dive into Keppel Reitz FY 2025.
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Thanks for listening. And before we go, here's the mandatory disclaimer.
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This content is intended to serve strictly and only as an informational, independent,
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objective summary of recent events, and should in no way be interpreted,
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construed, or relied upon by any party as inside information or financial advice.
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We'll see you on the next Deep Doe.