Keppel REIT - DBS Research 2020-10-20: Dancing To The Right Byte!


Keppel REIT - Dancing To The Right Byte!

  • No dividend declared as half-yearly distribution adopted; implied 3Q20 DPU (ex-capital distribution) is 1.4 Scts.
  • Keppel REIT's 3Q20 occupancy healthy at 98.3%; 97% rents collected and high tenant retention of 94%.
  • Return of employees to office bodes well for sentiment.
  • Key highlights:
    1. China tech giants’ expansion to offset potential vacancies in FY21,
    2. enquiries from flex operators,
    3. single digit positive reversion in FY20 on low expiring rents ( < S$10psf).

Keppel REIT's 3Q20 estimated DPU (without capital distribution) is equivalent to average quarterly DPU of 1.4 Scts.

  • Keppel REIT (SGX:K71U)'s 3Q20 distributable income (DI) (excluding capital distribution) was up 0.2% y-o-y aided by contributions from 311 Spencer St, commencement of major Singapore leases and lower borrowing costs. On our estimates, 3Q20 underlying DPU (without capital distribution) is equivalent to average quarterly DPU of 1.4 Scts.
  • As Keppel REIT has adopted half-yearly distribution from 2H20 onwards, it has will announce the capital distribution together with 2H20 results (i.e. FY2020 results announcement).
  • 9M20 DI fell 1.3% y-o-y partially due to divestment of Bugis Junction Towers and COVID-19 tenant relief and rental support.
  • Keppel REIT's 3Q20 revenue and NPI grew 6% y-o-y and 7% y-o-y to S$45m and S$36m respectively mainly due to contributions from 311 Spencer St. Income contribution from associates and JVs grew 9% y-o-y.
  • Average cost of debt continued to fall q-o-q to 2.39% vs 2.48% in 2Q20 and 2.82% in 2Q19 (2.77% in 4Q19)
  • Keppel REIT's gearing fell to 35% vs 36.3% in 2Q20. Gearing is expected to increase in 4Q20. Post-acquisition of the Pinnacle Office Park, Sydney and issuance of S$300m perpetual securities of which S$150m will be used to redeem expiring perpetuals, the aggregate leverage is estimated to be relatively flat q-o-q at 36.9%.
  • As at 3Q20, Keppel REIT has c.S$894m of undrawn credit facilities available of which c.S$426m are committed facilities. Weighted average term to maturity is 3.3 years.

Keppel REIT's operational metrics remain healthy – occupancy at 98.3%; collected 97% of rents; retention 94%

  • Keppel REIT's portfolio occupancy remains healthy at 98.3% despite a 0.3ppt drop q-o-q with strong rental collections of 97% in 3Q20 (vs 98% in 2Q20).
  • Lower occupancies were mainly from T Tower (-3ppt q-o-q), ORQ (-1ppt) and MBFC (-0.3 ppt). Australia portfolio occupancy was stable.
  • Average weighted signing rents of S$11.03psf pm (+1.1% q-o-q) remains above Grade A core CBD market average of S$10.70. Simple average rents were S$11.81psf pm (-0.4% y-o-y)
  • Given its low expiring rents, rental reversions remained strong at 15% in 3Q20 (vs +14.2% in 2Q20) and 15.4% in 9M20.
  • Keppel REIT completed 413k sqft of leases in terms of attributable NLA in 9M20 (145k sqft in 3Q20) mainly from financial services sectors. Retention rate in 3Q20 was 94%. Keppel REIT has completed all rent reviews in FY20 with minimal 1% of lease expiries remaining.

Impact from COVID-19 – minimal rent deferrals and employees making progressive return to office.

  • As at Sep20, tenant relief measures stood at c. S$13.8m of which S$10m are estimated to be government rebates and cash grant (as at 2Q20, estimated tenant support was c.S$12.5m, of which S$9.2m are government rebates and cash grant). Rental deferrals were minimal at S$1.7m as at 3Q20 (vs S$1.6m in 2Q20).
  • Physical occupancy in Singapore offices has increased from 30% to 40% and expected to increase further as more employees progressively return to the office.

Keppel REIT's Outlook –

Leasing activities have picked up with some pockets of demand from flex operators; expect China tech giants to drive demand from the tech sectors potentially to offset some potential vacancies in FY2021 / FY2022.

  • In 3Q20, Keppel REIT saw healthy demand especially from the financial services sector (including new demand from fund management) and pockets of expansion interest from flex operators while new demand from corporates remain subdued. With the recent expansion by the China tech giants (Bytedance continues to expand in ORQ), management expects demand from the tech sector to pick-up from 4Q20 which could offset some potential vacancies from financial services sector in FY21 / FY22.
  • The backfilling of UBS space in ORQ remains relatively flat but management is confident to fill more than 50% of this space by year-end.
  • The EY lease at 8 Exhibition St has been renewed at positive rental reversion.
  • Despite management continuing to expect pressure on rents, management expects to deliver single digit positive rental reversions given low expiring rents of S$9.72psf in FY21. The delay in the completion of Central Boulevard to 2023 bodes well for the office market especially in FY22.
  • With another tranche of S$150m perpetual securities raised in Oct, Keppel REIT is taking advantage of the attractive rate of 3.15% to keep some ‘firepower’ for potential capital deployment.
  • Management maintains its stance to utilise capital distributions to provide steady growth in DPU in view of potential vacancies in FY21.

Keppel REIT – Valuation

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-10-20
SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400