Keppel REIT - UOB Kay Hian 2021-01-26: 2H20 Resurgence Of Growth

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KEPPEL REIT (SGX:K71U)

Keppel REIT - 2H20 Resurgence Of Growth

• We are gratified to witness a resurgence of growth with Keppel REIT's 2H20 DPU expanding 4.6% y-o-y. Its Singapore office portfolio was resilient with positive rental reversion of 14.8% and stable portfolio occupancy of 97.9%. In Australia, 311 Spencer Street achieved practical completion on 9 Jul 20 and occupancy of 100%.
• Newly acquired Pinnacle Office Park will provide full-year contribution to Keppel REIT in 2021.
• Keppel REIT's 2021 distribution yield of 5.1% is attractive for a pure office REIT. Maintain BUY. Target price: S$1.45.

Keppel REIT's 2H20 Results

• Keppel REIT (SGX:K71U) reported 2H20 DPU of 2.93 cents, up 4.6% y-o-y, which is 5% above our forecast of 2.79 cents. The achievement was all the more remarkable due to the higher base in 2H19 caused by capital gain distribution of S$6m.

Singapore: Maintaining positive rental reversion.

• Total leases representing attributable NLA of 510,500sf were committed for 2020. The Singapore office portfolio achieved positive rental reversion of 12.7% in 4Q20 (2020: 14.8%). Average signing rents was S$11.02psf pm in 2020 (Grade-A Core CBD: S$10.40 psf pm in 4Q20).
• Portfolio weighted average lease to expiry (WALE) was a healthy 6.7 years (Singapore: 2.9 years, Australia: 12.8 years and South Korea: 2.0 years). WALE for Keppel REIT’s Top 10 tenants was 11.8 years. Portfolio occupancy eased slightly by 0.4ppt q-o-q to 97.9%.
• Renewal and rent review made up the lion’s share of 52.6% and 23.6% of committed leases respectively. New leasing demand was driven by banking, insurance & financial services (36.5%), real estate & property services (34.2%) and technology, media & telecommunications (13.5%). Retention rate was 72% in 2020.

Stoically weathering the COVID-19 pandemic.

• Rental collection was healthy at 98% in 4Q20. Keppel REIT's total rent deferrals amounted to only S$1.9m. Total tenant relief measures were S$14.6m, of which S$9.9m was in the form of government property tax rebate and cash grants (Keppel REIT’s share was only S$4.7m).

Australia: 311 Spencer Street commenced contribution after practical completion on 9 Jul 20.

• The building is on a 30-year lease for Victoria Police’s new headquarters and achieved occupancy of 100%. It contributed revenue of S$17m in 2H20. Keppel REIT has also completed asset enhancements for 8 Exhibition Street in Melbourne with rejuvenation of the lobby and other amenities.

South Korea: Occupancy has recovered.

• T Tower’s occupancy improved 3p.9pt q-o-q to 98.4% in 3Q20. It contributed stable revenue of S$8.3m in 2H20.

Benefitting from lower interest rates.

• Keppel REIT has lowered its all-in cost of borrowings by 0.04ppt y-o-y to 2.35% in 4Q20. It has issued S$300m of 3.15% perpetual securities to refinance S$150m of 4.98% perpetual securities to be redeemed in Nov 20. Interest expenses have declined 21% y-o-y in 2H20. Aggregate leverage has increased 2.3ppt q-o-q to 37.3% after completing the acquisition of Pinnacle Office Park funded by A$-denominated debt on 31 Dec 20.

NAV per share dropped 4.4% to S$1.29.

• Keppel REIT recognised drop in fair value of its investment portfolio of S$172m. The decline came from Ocean Financial Centre (-1.6%), Marina Bay Financial Centre (-1.7%) and One Raffles Quay (-1.1%).

Management sees sentiment improving for the office leasing market.

• Leasing enquiries and viewing have picked up since 4Q20. Demand is driven by non-bank financial institutions and technology companies. In particular, China technology giants Lazada, ByteDance and Tencent are looking to expand their presence in Singapore. ByteDance/TikTok have taken up 80,000sf of office space at One Raffles Quay. There is also pick-up from co-working/flexible office space.
• Singapore’s Grade-A office rent for Core CBD has declined 2.8% q-o-q to S$10.40psf pm in 4Q20, which is comfortably above expiring rents of S$9.76psf pm in 2021. Management targets positive single-digit rental reversions this year.

Good progress to backfill One Raffles Quay.

• UBS has relocated from its previous office premise at One Raffles Quay of 230,000sf to 9 Penang Road. Thus, occupancy at One Raffles Quay is expected to slip lower in 1Q21. However, Keppel REIT has backfilled 60% of the vacated office space and another 30% is under advanced negotiation. The new tenants are financial institutions and real estate & property services companies.

Full-year contribution from Pinnacle Office Park in 2021.

• Keppel REIT completed the acquisition of 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 20 minutes. On a pro forma basis, the acquisition is accretive to 2019 DPU by 4.5%.

Keppel REIT - Valuation & Recommendation

• We forecast Keppel REIT's 2021 DPU to increase 4.7% to 6.0 cents. Maintain BUY.
• See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.
• Our target price of S$1.45 is based on DDM (COE: 5.5%, terminal growth: 1.5%).
• Keppel REIT's share price catalysts:
  • Positive rental reversion for office properties in Singapore.
  • Full-year contributions from 311 Spencer Street in Melbourne and Pinnacle Office Park in Australia in 2021.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-26

SGX Stock Analyst Report BUY MAINTAIN BUY 1.45 UP 1.400