Keppel REIT - UOB Kay Hian 2021-04-22: 1Q21 Resurgence Of Growth


Keppel REIT - 1Q21 Resurgence Of Growth

  • We see resurgence of growth with Keppel REIT’s distributable income expanding 22% y-o-y in 1Q21. Keppel REIT benefitted from contributions from Victoria Police Centre in Melbourne and Pinnacle Office Park in Sydney. It achieved a positive rental reversion of 10.7% in 1Q21.
  • Management targets positive single-digit rental reversions in 2021.
  • Keppel REIT provides 2021 distribution yield of 5%, which is attractive for a pure play office REIT. Maintain BUY. Target price: S$1.49.

Keppel REIT's 1Q21 Results

  • Keppel REIT (SGX:K71U)’s distributable income from operations increased 22% y-o-y to S$51.6m (equivalent to DPU of 1.47 cents) in 1Q21, which is in line with our expectations.

Growth from development project and acquisition.

  • Keppel REIT's NPI attributable to unitholders increased 40.5% y-o-y in 1Q21 due to contributions from Victoria Police Centre in Melbourne (311 Spencer Street) and Pinnacle Office Park in Sydney. Contributions from associates and JVs increased 25.9% y-o-y due to lower cost of borrowings, appreciation of the A$ and one-off income from the re-instatement of leases at One Raffles Quay (ORQ) (net positive impact of S$2.5m).

Maintained stable occupancies in Singapore.

  • Keppel REIT's portfolio occupancy edged slightly lower by 1.4ppt q-o-q to 96.5%.
    • Occupancy at Ocean Financial Centre (OFC) improved 0.8ppt q-o-q to 98.3% but occupancy at ORQ eased 3.3ppt q-o-q to 94% (UBS and QBE vacated). 89% of the space vacated by UBS is already committed, and contributions from new tenants will kick in by 4Q21.
    • Occupancy at 8 Exhibition Street in Melbourne and 275 George Street in Brisbane eased 3.6ppt and 5.9ppt q-o-q respectively to 96% and 90.6%.
  • Keppel REIT's weighted average lease expiry (WALE) remains long at 6.7 years (top 10 tenants: 11.8 years).

Singapore: Achieved positive rental reversion.

  • Keppel REIT achieved positive rental reversion of 10.7% in 1Q21. Average signing rents for Singapore office leases was S$10.64psf, which is slightly above S$10.40psf for Grade-A office space within core CBD. Banking, insurance & financial services and manufacturing & distribution accounted for 38.8% and 32.7% of new leasing demand respectively.
  • We expect Keppel REIT to maintain positive rental reversion as average expiring rents are low at S$9.98psf in 2021 and S$10.27psf in 2022.

Stoically weathering the COVID-19 pandemic.

  • Rental collection was healthy at 99% in 1Q21. Outstanding rent deferrals amounted to only S$1.2m (4Q20: S$1.9m). Keppel REIT granted tenant relief of only S$0.1m in 1Q21. In Singapore, work from home is no longer the default. The government has lifted the limit on employees returning to work from office from 50% to 75% with effect from 5 Apr 21.

All-in cost of debt was reduced from 2.35% to 2.01%.

  • Keppel REIT's aggregate leverage was reduced to 35.2% after the private placement of 238.9m new units to raise S$270m on 1 Mar 21. Aggregate leverage will increase to 39.4% post completion of acquisition of Keppel Bay Tower.
  • Keppel REIT has obtained loan facilities to refinance all outstanding loans in 2021. Green loans accounted for 25% of Keppel REIT’s total borrowings.


Rebalancing to strengthen diversification and resiliency.

  • Keppel REIT has optimised its asset and tenant mix to enhance diversification and resiliency:
    1. Less exposure to financial institutions. Keppel REIT has reduced its concentration and 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 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. Diversifying to CBD fringe. 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 expand 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.

To complete acquisition of Keppel Bay Tower in 2Q21.

  • Keppel REIT will acquire Keppel Bay Tower from sponsor Keppel Land at S$657.2m (S$1,700psf), which 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 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. Key tenants are Keppel Group, BMW Asia, Mondelez International, Pacific Refreshments and Syngenta.




  • Positive rental reversion for office properties in Singapore.
  • Full year contribution from Victoria Police Centre (311 Spencer Street) in Melbourne and Pinnacle Office Park in Sydney in 2021.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-22
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