Keppel REIT - RHB Invest 2020-10-20: Another Stable Quarter


Keppel REIT - Another Stable Quarter

  • Keppel REIT (SGX:K71U)’s 3Q20 distributable income rose 4.6% y-o-y, aided by the recently completed 311 Spencer Street and lower interest expenses.
  • Despite COVID-19, Management noted 3Q office leasing demand surpassed expectations with strong double-digit rent reversions (+15%).
  • Keppel REIT has been pivoting towards rental stability with recent Australian acquisitions offering long weighted average lease expiry. One concern, however, is the anticipated downsizing by financial institution tenants (36% of total) in the medium term.

A decent quarter in terms of leasing driven by financial institutions.

  • Keppel REIT signed ~330,000 sqf of new leases in 3Q20, primarily driven by office demand from smaller fund houses and insurance companies. Overall occupancy remained high at 98.3%, with 97% of 3Q rents collected. Average signing rents (3Q) were higher 1% q-o-q at SGD11.03 psf/month (psfpm) despite the overall market decline due to a good size of spaces that were leased and relocation demand from financial institutions.

Rent reversion (3Q) was healthy at 15% (YTD: +15.4%).

  • Management however cautioned that it expects rental pressure in the coming quarters as companies reassess leasing options post COVID-19, but overall, it still expects high single-digit rent reversions for 2021 as average expiring rents are still ~15% below current signing rents.
  • As at 3Q20, only SGD1.7m of rents have been deferred (2Q: SGD1.6m) and Keppel REIT has provided SGD13.8m in tenant relief (2Q: SGD12.5m) including an estimated SGD10m of government property tax rebates and cash grants.

Keppel Bay Tower potential near-term acquisition target.

  • With the recent asset enhancement initiative (AEI) completion and achievement of the Green Mark Platinum standard, Keppel REIT sees Keppel Bay Tower as a good fit to its portfolio, if the sponsor chooses to divest. The acquisition, however, will depend on pricing and DPU accretion.
  • Keppel REIT in September announced the acquisition of Pinnacle Office Park – a Grade-A commercial building located near Macquarie Park metro station in Sydney – for AUD306m (SGD303.3m), which is expected to be completed in 4Q. It also issued SGD300m of perpetual securities in 3Q, part of which will be used to fund the acquisition. Gearing post acquisition stands comfortable at 36.9% providing > SGD 500m of debt headroom for future acquisitions (assuming 40% as a comfortable level).
  • All-in interest costs have also come down by 43bps to 2.39% pa, aided by lower interest rates.
  • Keppel REIT also has > SGD50m in capital gains, which can be used to smoothen out distribution and potential share buybacks.

Vijay Natarajan RHB Securities Research | 2020-10-20
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.14 UP 1.100