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

KEPPEL REIT (SGX:K71U)

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.

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.

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.

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.

We leave our FY21-23F DPU estimates for Keppel REIT unchanged and retain our DDM-based target price of S$1.29.
Potential catalysts for Keppel REIT include the redeployment of divestment proceeds to new accretive acquisitions and a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space.
See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.

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