Keppel REIT - UOB Kay Hian 2021-03-25: Steadier & Sturdier – The Sole Pure Play On Office


Keppel REIT - Steadier & Sturdier – The Sole Pure Play On Office

  • Keppel REIT has enhanced its resiliency by reducing exposure to financial institutions, increasing exposure to sovereign tenants, lengthening its WALE and diversifying its asset mix towards the CBD fringe. It is the key beneficiary of recovery in the office market as the only pure play on office listed on the SGX.
  • We raise Keppel REIT's 2022 DPU forecast by 2% after factoring in full-year contribution from Keppel Bay Tower. Maintain BUY. Target price: S$1.49.

Rebalancing to strengthen diversification and resiliency.

  • Keppel REIT (SGX:K71U) has optimised its asset and tenant mix to enhance diversification and resiliency: 
    1. Less exposure to financial institutions. Keppel REIT has reduced its reliance on banks, insurance & financial services from 45% to 32.8% of its total net lettable area (NLA) over the past five years. The acquisition of Keppel Bay Tower is expected to further reduce the exposure to 30.8%.
    2. More exposure to sovereign tenants. Keppel REIT’s exposure to government agencies has expanded from 7% to 16% of total NLA over the past five years. Major sovereign tenants include State of Victoria (Victoria Police Centre) at 311 Spencer Street in Melbourne and Government of Western Australia at 28 Barrack Street (David Malcolm Justice Centre) in Perth.
    3. Lengthening of WALE. Keppel REIT’s weighted average lease expiry (WALE) has increased from 4.6 to 6.7 years, which is driven by an expansion of its Australia WALE from 8.5 to 12.8 years post-completion of 311 Spencer Street in Melbourne.
    4. Keppel REIT has diversified its asset mix towards the CBD fringe through the acquisition of Pinnacle Office Park at Macquarie Park, Sydney in Dec 20. Post-acquisition of Keppel Bay Tower, exposure to CBD fringe will account from 3.9% to 11% of assets under management (AUM).

Stabilisation in office market supported by economic recovery.

  • Leasing activities have started to pick up since end-20. Demand remains subdued in 1H21 but should start to recover in 2H21, driven by non-bank financial services companies and Chinese technology companies. Displaced tenants from buildings slated for redevelopment, such as AXA Tower and Fuji Xerox Towers, will also be looking for office space. Business sentiment has improved with the rollout of COVID-19 vaccinations.

Maintaining positive rental reversion for Singapore portfolio.

  • According to CBRE, 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 still comfortably above Keppel REIT’s average expiring rents of S$9.76psf pm in 2021. Management targets positive single-digit rental reversions this year.

Enhancing pandemic preparedness.

  • Ocean Financial Centre (OFC) has become the first office building in Singapore to achieve the WELL Health-Safety Rating by the International WELL Building Institute, a third-party verified rating to address a post-COVID-19 environment for air and water quality management, cleaning and sanitisation procedures to emergency preparedness, such as conducting annual safety exercises and pandemic drills.
  • Ocean Financial Centre’s air filtration system has three layers of filters, including MERV 14 filters and an ultraviolet-C lighting system, which substantially remove airborne particles, germs, bacteria and viruses. The water tank is thoroughly cleansed and flushed to avoid any build-up of bacteria. High frequency touchpoints have anti-microbial disinfectant coating and are regularly disinfected.

Headwinds of weak AUD transformed into tailwinds of strong AUD.

  • The Australian dollar (AUD) has strengthened 7.7% against the Singapore dollar in 2020 and 0.7% on a year-to-date basis in 2021. The AUD has benefitted from the rally in commodities. Australia accounted for 23.8% of Keppel REIT’s attributable NPI in 2020, and accounted for $$1,641m or 18.5% of AUM as of end-Dec 20.
  • Keppel REIT has borrowings of S$482m, or 15% of total debt denominated in AUD. Thus, there is a natural hedge for 39% of its AUM in Australia as of end-Dec 20.

Long WALE driven by 311 Spencer Street.

  • 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. 311 Spencer Street will make full-year contribution in 2021 and account for an estimated 10% of attributable NPI.

Tapping on sponsor pipeline.

  • Keppel REIT is expected to complete the acquisition of a 100% stake in Keppel Bay Tower from Keppel Land in 2Q21. The agreed property value of S$657.2m (S$1,700psf) provides an initial NPI yield of 4.0% (Keppel REIT’s existing Singapore office properties: 3.2%).
  • Keppel Bay Tower is a Grade-A office building located in the Keppel Bay waterfront precinct in the HarbourFront area, which is part of Singapore’s Greater Southern Waterfront (GSW). It comprises an 18-storey tower block and a 6-storey podium block with total NLA of 386,600sf and was completed in 2002. Asset enhancement works, including the refurbishment of the office lobby with modern fittings and quality finishes, were completed in 2019.
  • Key tenants are Keppel Group, BMW Asia, Mondelez International, Pacific Refreshments and Syngenta. Keppel Bay Tower has a committed occupancy of 99.2% and a WALE of 3.3 years by NLA.

Equity fund raising successfully completed.

  • Keppel REIT's management estimated DPU accretion of 2.7% for 2019 and 2.9% for 1H20. Keppel Land will provide rental support of up to S$3.2m over a period of 18 months based on market rent for vacant units in the property.
  • Keppel REIT has completed the placement of 238.9m new units at an issue price of S$1.13 to raise gross proceeds of S$270m on 1 Mar 21 (40%). It has also drawn down S$400m from loan facilities (60%). We estimated that aggregate leverage has increased from 36.3% to 38.6% post-acquisition.

Maintain BUY on Keppel REIT

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-25
SGX Stock Analyst Report BUY MAINTAIN BUY 1.49 UP 1.450