Keppel REIT - DBS Research 2020-07-21: Keeping A Steady Beat


Keppel REIT - Keeping A Steady Beat

  • Keppel REIT's 2Q20 DPU +0.7% y-o-y, flat q-o-q at 1.40 Scts supported by higher capital distributions and lower interest expense.
  • Portfolio occupancy healthy at 98.6%; 98% of rents collected and high retention of 91% in 2Q20.
  • COVID-19 support package increased to S$12.5m - S$3.3m is out-of-pocket and S$1.6m rental deferment.
  • Key highlights:
    1. 311 Spencer St to contribute from July 2020;
    2. tenants progressively returning to office;
    3. no significant downsizing / rightsizing requests but pockets of expansion interest from technology, financial institutions and flex space operators.

Keppel REIT's 2Q20 results

DPU maintained with support from capital distributions.

  • Keppel REIT (SGX:K71U)'s 2Q20 DPU +0.7% y-o-y to 1.4 Scts despite the divestment of Bugis Junction Tower and absence of income support; mainly supported by higher capital distributions of S$5m vs S$3m in 2Q19 and lower borrowing costs.
  • Keppel REIT's 1H20 DPU +0.7% y-o-y to 2.8 Scts on higher capital distributions of S$10m vs S$6m in 1H19, in line with our FY20F estimates. Excluding capital distributions, underlying 2Q20 DPU fell 3.8% y-o-y and was flat q-o-q.
  • After this quarter’s capital distributions, Keppel REIT has S$467m of capital gains remaining.
  • 2Q20 revenue and NPI fell 8% y-o-y and 7% y-o-y to S$37m and S$29m respectively mainly due to loss of income following the divestment of Bugis Junction Tower, partially offset by contribution from T Tower which was acquired in May 2019 and commencement of major leases (HSBC lease started in May20).
  • Income contribution from associates and JVs grew 5% y-o-y mainly due to commencement of HSBC lease in MBFC and lower borrowing costs offset by tenant reliefs, carpark income and lower AUD.
  • Interest expense on borrowings fell 28% y-o-y as average cost of debt fell to 2.48% vs 2.86% in 2Q2019 (2.77% in 4Q2019).
  • Gearing was flattish at 36.3% vs 36.2% in 1Q2020.
  • As at end of 2Q2020, Keppel REIT has refinanced all loans expiring in FY2020. The weighted average term to maturity stood at 3.6 years. Borrowing costs reduced to 2.48% from 2.58% as at 1Q20.
  • As at 2Q20, Keppel REIT has in place c.S$938m of undrawn credit facilities available, of which c.S$369m are committed facilities.

Keppel REIT's operational metrics remain healthy –

Occupancy at 98.6%; collected 98% of rents; 91% retention

  • Portfolio occupancy remains healthy at 98.6% despite a 0.3ppt drop q-o-q; strong rental collections at 98% in 2Q20 despite the Circuit Breaker / lockdown.
  • Lower occupancies were mainly from T Tower (-2.3ppts) and 275 George St (-1.6ppts due to non-renewals). While COVID-19 has slowed leasing activities, remaining lease expiries in Australia in FY20 and FY21 is small at 0.1% and 1.8% of NLA respectively.
  • Average signing rents of S$11.86psf pm remains above Grade A core CBD market average of S$11.15 but fell 2% q-o-q, in line with the decline in market rents of 3% q-o-q.
  • Given low expiring rents, rental reversions were strong at 14.2% in 2Q20 and 15.3% in 1H20.
  • Keppel REIT finalised leases on 268k sqft of attributable NLA in 1H2020 comprising expansion in the real estate and property, tech and financial institution sectors. Retention rate in 2Q20 was 91%. As such, lease expiries and rent reviews in FY2020 are minimal at 2.4% and 0.5% respectively.
  • 311 Spencer Street has achieved practical completion on 9 July 2020 and will contribute income thereafter.

Impact from COVID-19 –

c.S$5m out-of-pocket from rental waivers and rental deferment.

  • Following the new rental waiver bill for eligible SMEs, Keppel REIT increased its tenant relief measures to c.S$12.5m (vs c.S$9.5m in 1Q20), of which an estimated S$9.2m are property tax rebates to be received from the Singapore government with S$3.3m as out-of-pocket.
  • Approximately S$7m of the rental support has been recognised in 2Q20 while the remaining S$5.5m is expected to be recorded in 3Q20.
  • Keppel REIT estimates that eligible SME tenants within its portfolio comprises c.5.6%, of which 4.2% is from its Singapore portfolio and 1.6% from its Australian portfolio.
  • As at Jun20, Keppel REIT has allowed S$1.6m of rent deferrals which represents approximately 2-3 months of rentals for eligible tenants.
  • Management expects to provide further rental support for its retail tenants ( < 2% of its portfolio) post reopening at the end of Circuit Breaker but does not expect the amount to be significant.

Outlook –

Tenants prefer to renew leases and keep existing space with pockets of expansion interest; pressure on rents may drive reversions flattish to slight positive.

  • Post the end of Circuit Breaker and progressive reopening, management is seeing a gradual return of tenants to office buildings, operating at approximately 15-20% of the occupancy of the buildings. This is quite similar in Australia (except Victoria) while most tenants have been operating from T Tower, Seoul.
  • While leasing activities have progressively picked up since the reopening, management disclosed that tenants are keeping their office space stable with some pockets of expansion demand from technology and financial institution sectors. Management has yet to see significant impact from tenants looking to downsize / right size just yet.
  • Management expects some pressure on rents. Given that expiring rents have crept up marginally in FY20 to S$10.45psf, positive rental reversions would taper off for the rest of FY20. FY21 should see stronger reversion when market improves from expiring rents of S$9.73psf in FY21.
  • As leasing activities slowed in 2Q20, the backfilling of UBS space stayed relatively flat at 17%. Management hopes to back fill majority of this space by the end of the year.
  • See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-07-21
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