Keppel REIT - DBS Research 2020-06-08: Style, Quality, Excellence


Keppel REIT - Style, Quality, Excellence

  • Keppel REIT’s best-in-class office portfolio is well-positioned to benefit from a potential recovery in a very tight net supply market.
  • The only pure office REIT left post CapitaLand Mall Trust-CapitaLand Commercial Trust merger will be highly valued.
  • Less impacted by new rental waiver bill as portfolio comprises minimal SME tenants.
  • Maintain BUY; lower Target Price to S$1.35.

Keppel REIT's 1Q20 results – DPU maintained with higher capital distributions:

  • Keppel REIT (SGX:K71U)'s 1Q20 DPU rose 0.7% y-o-y despite the divestment of Bugis Junction Tower and the absence of income support, mainly supported by higher capital distributions of S$5m vs S$3m in 1Q19 (S$4m in 4Q19), contrary to what its S-REIT peers are doing.
  • Post this quarter’s capital distributions, Keppel REIT has S$472m of capital gains remaining.
  • Keppel REIT's revenue and NPI fell 3% y-o-y and 4% y-o-y to S$39m and S$30m respectively mainly due to the loss of income following the divestment of Bugis Junction Tower, partially offset by contribution from T Tower which was acquired in May 2019.
  • Income contribution from associates and JVs fell 2% y-o-y mainly due to lower contributions from MBFC (-13% y-o-y) and ORQ (-8% y-o-y) following the loss of income support and non-renewals which have largely been backfilled.
  • Interest expense on borrowings fell 15% y-o-y as average cost of debt fell to 2.58% vs 2.88% in 1Q19 (2.77% in 4Q19)
  • Gearing inched up to 36.2% vs 35.8% in 4Q19 following progressive payments for ongoing development of 311 Spencer St.
  • As at end of 1Q20, the S$400m loans due in FY20 had been refinanced or received commits/facilities to be refinanced. As such, the weighted average term to maturity had been extended to 3.8 years vs 3.4 years as at December 2019.
  • Keppel REIT has in place c.S$966m of undrawn credit facilities available of which c.S$400m are committed facilities.

Operational metrics remain healthy:

  • Keppel REIT's portfolio occupancy remains healthy at 98.9% despite a 0.2ppt drop q-o-q.
  • Lower occupancies were mainly from OFC (-0.4ppt q-o-q), 8 Exhibition St (-1.8ppts) and 275 George St (-1.5ppts). We understand that the lower occupancies in 8 Exhibition St and 275 George St were due to non-renewals. Negotiations are currently ongoing and we should see more updates in the next quarter.
  • Average signing rents of S$12.16 psf/mth remains above Grade A core CBD market average but fell 2% from the peak in 4Q19, recording an 18.8% positive rental reversion in 1Q20. However, weighted average rents was flat q-o-q at S$12.08 psf/mth.
  • Keppel REIT completed 75.2k sqft leases of attributable NLA in 1Q20 comprising expansions in the real estate and property, financial institutions and tech sectors. As such, lease expiries and rent reviews in FY20 were lowered by 2.4ppts to 8.4% (4.7% expiries and 3.7% rent reviews).

Impact from COVID-19 – estimated < 5% impact on income

  • Keppel REIT has extended c. S$9.5m of tenant support measures, of which S$8.2m are estimated property tax rebates to be received from the Singapore government. These property tax rebates will be fully passed through to its office and retail tenants.
  • Keppel REIT will be extending to eligible retail tenants a full rental waiver in April 2020 and utilise one month’s security deposit to offset rent payment. Retail tenants comprise only c.1.8% of Keppel REIT’s portfolio NLA.
  • For office tenants, besides the pass-through of property tax rebates, Keppel REIT estimates the proportion of high-risk tenants asking for rental rebates/rental deferment to be only c.4.5% of portfolio NLA. They are largely from tourism-related technology, co-working & serviced offices, gyms, medical clinics and hospitality-related trade mix.
  • In Australia, the “Mandatory Code of Conduct” issued by the National Cabinet has made it mandatory to extend rent deferment and reductions to SME tenants. Keppel REIT estimates that less 5% of its Australia tenants fall under this category.
  • We estimate COVID-19 could impact less than 5% of its income.


Continue to deliver positive rental reversions; downsizing risks in FY21 partially offset by new leases; continue to search for acquisition opportunities.

  • Despite some pressure on office rental rates, Keppel REIT's management expects to continue delivering high positive single-digit to low double-digit rental reversions with the buffer from low expiring rents ranging from S$9.37 in FY20 to S$10.20 in FY22.
  • As leasing activities slowed, management expects some vacancies/non-renewals to take longer to backfill. As of 1Q20, 17.6% of the UBS space has been backfilled.
  • While lease expiries/rent reviews in FY20 have been reduced to below 10%, management expects some downsizing risks from lease expiries/rent reviews in FY21 which contribute 23% of gross rents, comprising some large financial institution leases.
  • Similarly in Korea and Australia, management expects some non-renewals when leases expire such as that for Quantium Group at 8 Chifley. In Korea, despite the potential risks in occupancy, management hopes to maintain a healthy occupancy rate of c.90% and expects rents to remain stable.
  • These could be partially offset by contributions from HSBC Singapore’s 10-year lease expected to begin in May 2020 and Victoria Police’s 30-year lease at 311 Spencer Street, Melbourne post completion expected by end-2Q20.
  • Management continues to look for acquisition opportunities and may see some opportunities appearing in Australia if cap rates expand to 4.5% - 5%
  • Although MAS has increased the gearing limit to 50%, management remains comfortable at the 40-42% range and will utilise its debt headroom for potential acquisitions and capital distributions (if needed).
  • Keppel REIT will adopt half-yearly reporting from 2H20.

Maintain BUY; lower Target Price to S$1.35.

See also S-REIT sector reportSingapore Office REITs - DBS Research 2020-06-08: Grab It While It Lasts.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-08
SGX Stock Analyst Report BUY MAINTAIN BUY 1.35 DOWN 1.450