Keppel REIT - CGS-CIMB Research 2021-04-21: New Acquisitions Boost Earnings


Keppel REIT - New Acquisitions Boost Earnings

  • 1Q21 saw higher revenue and distributable income from operations y-o-y due to new acquisitions and interest cost savings.
  • We expect positive reversion to continue, but possible drag from potential frictional vacancy.
  • Reiterate ADD rating on Keppel REIT with an unchanged DDM-based target price of S$1.29.

Keppel REIT's 1Q21 business update

  • In its 1Q21 business update, Keppel REIT (SGX:K71U) reported gross revenue of S$51.1m, +32% y-o-y, while distributable income from operations grew 22% y-o-y to S$51.6m with the commencement of Victoria Police Centre in Melbourne in Jul 2020 and acquisition of Pinnacle Office Park in Dec 2020 as well as higher one-off income and lower borrowing costs.
  • As Keppel REIT has adopted a half-yearly reporting frequency, no capital gain distribution was declared in this 1Q update.

Positive rental reversions

  • Portfolio committed occupancy slipped q-o-q to 96.5% at end-1Q. Keppel REIT renewed/leased ~309.8k sq ft of space in 1Q21 at an average rental uplift of about 10.7% amid a low retention rate of 44%. Over half of leasing activity came from new leases, mainly from banking, insurance and financial services, manufacturing and distribution and legal sectors.
  • As at end-1Q21, Keppel REIT had 13.4% of leases to be renewed/reviewed in FY21F and a further 16.4% in FY22F. Expiring rents for FY21F averaged S$9.98psf and S$10.27psf in FY22F. While we believe lease reversions could remain slightly positive for FY21F given the low expiring rental level, potential portfolio frictional vacancy may drag on earnings outlook.
  • In terms of the impact from COVID-19, Keppel REIT indicated that it granted S$0.1m of tenant reliefs in 1Q21 and has also allowed S$1.2m of rents to be deferred.

Robust balance sheet

  • Keppel REIT’s gearing stood at 35.2% at end-1Q. Post completion of Keppel Bay Tower purchase, estimated to be by 2Q21, management indicated that its aggregate leverage could increase to 39.4%.
  • All-in interest cost stood at 2.01% at end-1Q while 85% of its borrowings are on fixed rates. With no major refinancing needs in FY21F, Keppel REIT continues to be in a strong position to continue to evaluate accretive inorganic growth opportunities.

Reiterate ADD rating on Keppel REIT

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-21
SGX Stock Analyst Report ADD MAINTAIN ADD 1.290 SAME 1.290