Keppel REIT - RHB Invest 2020-07-21: Resilient So Far


Keppel REIT - Resilient So Far

  • Keppel REIT posted a decent set of 2Q results with portfolio metrics showing good resilience so far.
  • While Keppel REIT stands in a relatively good position to wither COVID-19 on the back of strong assets quality and low expiring office rents, a key risk remains downsizing/right sizing of office spaces.

Flattish 2Q DPU YoY

  • Keppel REIT (SGX:K71U)'s flattish 2Q DPU y-o-y aided by a higher share of associate contributions (mainly due to lower interest expense), contributions from T-Tower and higher capital top ups (SGD5m vs SGD3m in 2Q19) offsetting loss of income from Bugis Junction Towers (divested), rent reliefs and AUD weakening.
  • Only 5.6% of the entire Keppel REIT’s NLA is occupied by small & medium enterprises and thus the impact of the mandatory rent relief (one month for office and two months for retail tenants) has been minimal.
  • Keppel REIT has so far set aside SGD12.5m in rental relief (of which property tax and government cash grants amount to SGD9.2m of it). About SGD7.0m of rent rebates has already been included in the 1H numbers. Management doesn’t see the need for further large rental reliefs except for some of its retail tenants. In addition, it has also granted SGD1.6m of rent deferrals, an amount expected to be recovered over the next 12-18 months.
  • Rent collections in 2Q remained healthy at 98%.

Strong positive rent reversions for 1H, but growth to taper off.

  • Keppel REIT posted a healthy double digit (+15%) rent reversion for the leases signed in 1H20 aided by low expiring rents, with some leases signed pre COVID-19. Leasing demand came mainly from technology-related companies and some financial institutions.
  • Management expects pressure on office rents ahead but still expects to post a positive rent reversion for full year. Overall occupancy stood at 98.6% (-0.3ppt q-o-q) mainly due to an occupancy decline at T-Tower.
  • We expect occupancy to decline by 1-3ppt in 2H20 with one of its key tenants, UBS, moving out from One Raffles Quay.

311 Spencer Street has commenced contribution

  • 311 Spencer Street has commenced contribution on 10 July 2020 after achieving a practical completion. Keppel REIT owns a 50% stake in the asset which is 100% leased to Victoria Police (a 30-year lease) with an annual rent escalation (c.3.5% pa) and an initial NPI yield (first 12 months) of 4.4%.

Acquisitions still in cards; Refinanced 2020 loans at much lower interest cost.

  • Keppel REIT has refinanced an amount of SGD400m in loans due this year and interest cost decreased 10bps q-o-q to 2.48% (2Q19: 2.86%). Management remains on the lookout for acquisitions and noted that among its markets, Australia (Sydney and Melbourne) is where it mainly sees opportunities.
  • Gearing remains modest at 36.3% presenting a comfortable debt headroom of c.SGD500m (assuming 40% levels).

Earnings change.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-07-21
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