Keppel REIT - CGS-CIMB Research 2020-10-20: Higher Operational Income In 3Q20

KEPPEL REIT (SGX:K71U)

Keppel REIT - Higher Operational Income In 3Q20

Keppel REIT’s 3Q20 income was boosted by new Australian contributions and lower interest expenses.
Keppel REIT continues to enjoy positive reversions; gearing healthy at 35%.
Reiterate ADD on Keppel REIT with an unchanged DDM-based Target Price of S$1.25.

In its 3Q20 business update, Keppel REIT (SGX:K71U) reported a gross revenue of S$44.8m, +5.7% y-o-y, while distributable income from operations grew 4.6% y-o-y to S$47.6m with the commencement of 311 Spenser St in Melbourne in July 2020 and lower interest expenses.
As Keppel REIT has adopted a half-yearly reporting frequency, no capital gain distribution was declared in this 3Q update.

Portfolio committed occupancy stood at 98.3% at end-3Q. Keppel REIT renewed/leased c.332.4k sq ft of space in 3Q20 at an average rental uplift of about 15% and a high retention rate of 94%. Over half of leasing activity came from renewals while another 16.7% came from new leases, mainly from real estate, TMT and banking and financial services sectors.
As at end-3Q20, Keppel REIT had 0.9% of leases to be renewed/reviewed in FY20F and a further 20.5% and 17.6% in FY21F and FY22F, respectively.
Expiring rents for FY21F average S$9.72psf and S$10.25psf in FY22F. Management expects lease reversions to remain slightly positive for FY21F given the low expiring rental level.
In terms of the impact from COVID-19, Keppel REIT estimates that tenant support measures including property tax rebates and rental waivers amounted to c.S$13.8m as at end-3Q. It has also allowed S$1.7m of rents to be deferred.

Keppel REIT’s gearing stood at 35% at end-3Q while its all-in interest cost declined q-o-q to 2.39%. Keppel REIT also issued S$300m of perpetual securities in Sep/Oct 2020.
Management expects gearing to trend a little higher, but to remain at a still healthy 36.9%, after taking into account the acquisition of the Pinnacle Office Park in Sydney. This puts the group in a strong position to continue to evaluate accretive inorganic growth opportunities.

We tweak our FY20F DPU up marginally on interest cost savings but lower our FY22-23F DPU estimates by 1.21-1.28% to factor in the higher-than-expected quantum of perpetual security issuance. Our DDM-based Target Price for Keppel REIT remains unchanged at S$1,25 as we roll over our DDM assumptions into FY21F.
See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.
Potential catalysts include the redeployment of divestment proceeds into new accretive acquisitions and a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-20

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