Keppel REIT - UOB Kay Hian 2020-10-20: 3Q20 More Resilient Than Anticipated

KEPPEL REIT (SGX:K71U)

Keppel REIT - 3Q20 More Resilient Than Anticipated

Keppel REIT's 3Q20 results are in line with expectations. Its Singapore office portfolio was resilient with positive rental reversion of 15.4%, high retention ratio of 94% and stable occupancies. In Australia, 311 Spencer Street achieved practical completion on 9 Jul 20 and occupancy of 100%.
Keppel REIT’s portfolio WALE by NLA has improved from 4.6 to 7.1 years as 311 Spencer Street has WALE of 30 years (30-year lease for Victoria Police’s new headquarters).

Keppel REIT (SGX:K71U) reported 3Q20 distributable income of S$47.6m, flat y-o-y (up 4.6% y-o-y if we exclude capital gain distribution of S$2m from 3Q19). See Keppel REIT Announcements. It did not dish out any capital gain distribution for 3Q20 and will disclose capital gain distribution for 2H20 when it announces full-year 2020 results.

Total leases representing NLA of 332,400sf were committed for 3Q20. The Singapore office portfolio achieved positive rental reversion of 15.4% in 3Q20 (2Q20: 14.2%). Average signing rents was S$11.03psf pm in 9M20 (Grade-A Core CBD: S$10.70 psf pm in 3Q20).
Renewal and rent review made up the lion’s share of 54.1% and 29.2% of committed leases respectively. New leasing demand was driven by real estate & property services (38.2%), technology, media & telecommunications (23.7%), and banking, insurance & financial services (21.1%). Retention rate was high at 94% in 3Q20 (2Q20: 91%). Keppel REIT has completed all of its rent review for 2020, and has less than 1% of expiring leases remaining.
Occupancies for Marina Bay Financial Centre (MBFC), One Raffles Quay (ORQ) and Ocean Financial Centre (OFC) were stable at 98.8%, 98.4% and 97.8% respectively.

Occupancies for Keppel REIT’s office buildings in Australia remained unchanged in 3Q20 despite weakness in office markets across various cities, such as Sydney CBD (89.7%/-3.3ppt q-o-q), Melbourne CBD (87.9%/-4.6ppt q-o-q) and Brisbane CBD (88.2%/-0.8ppt q-o-q) based on Jones Lang LaSalle (JLL).
311 Spencer Street commenced contribution after practical completion on 9 Jul 20. The building achieved occupancy of 100%. Keppel REIT’s portfolio weighted average lease to expiry (WALE) by NLA improved from 4.6 to 7.1 years as 311 Spencer Street has WALE of 30 years (30-year lease for Victoria Police’s new headquarters).

T Tower’s occupancy declined by 3ppt q-o-q to 94.7% in 3Q20. According to JLL, occupancy for CBD Grade-A offices for Seoul was stable at 85.1%.

Keppel REIT has lowered its all-in cost of borrowings by 0.43ppt y-o-y to 2.39% in 3Q20. It has issued S$300m of 3.15% perpetual securities to refinance S$150m of 4.98% perpetual securities to be redeemed in Nov 20. Aggregate leverage has dropped 1.3ppt q-o-q to 35% as Keppel REIT repaid some of its borrowings.

Demand is mainly driven by technology companies, such as Chinese technology giants Lazada, Bytedance and Tencent. There is also pick-up from co-working/flexible office space. Management expects the positive momentum to continue into 4Q20.
Some financial institutions may give up office spaces going into 2021-22, but this will be mitigated by growing demand from technology companies and some re-locations from Hong Kong.

Grade-A office rent for Core CBD was S$10.70 psf pm in 3Q20, which is comfortably above expiring rents of S$9.72psf pm in 2021. Management is hopeful of achieving positive single-digit rental reversions for 2021.

Potential acquisition pipeline from its sponsor includes Keppel Towers at Hoe Chiang Road (completion in 2024) and Keppel Bay Tower at Harbourfront Avenue. Acquisition of Keppel Bay Tower is feasible as its asset enhancement initiative was completed and occupancy has stabilised. Keppel REIT is also on the lookout for potential acquisitions in Australia and South Korea from third-party vendors.
In terms of divestment, Keppel REIT will consider its office buildings in Australia, especially those it has held for a long time. One potential candidate for divestment is 275 George Street in Brisbane.
Keppel REIT will acquire a 100% stake in Pinnacle Office Park, comprising three freehold Grade-A office buildings located in Macquarie Park in Sydney, at an agreed property value of A$306.0m (S$303.3m) or an initial net property income yield of 5.25%. Pinnacle Office Park is located at close proximity to Macquarie Park Metro Station. It is expected to benefit from the completion of the City and Southwest metro rail in 2024, which will reduce the commuting time between Macquarie Park and the CBD to just 20mins.The acquisition is targeted to complete in 4Q20. On a pro forma basis, the acquisition is accretive to 2019 DPU by 4.5%. It will be fully funded with A$-denominated debt.

Tenant relief measures were estimated at S$13.8m (property tax rebates and cash grants from the government: S$10.0m, rental waivers: S$3.8m) as at 30 Sep 20. Rental collection was healthy at 97% for 3Q20 with only S$1.7m in rent deferrals. Keppel REIT did not see significant pre-termination.
We maintain our existing earnings forecast with target price based on DDM.
See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-20

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