Keppel REIT - CGS-CIMB Research 2021-07-28: Performance Boost From New Acquisitions

KEPPEL REIT (SGX:K71U)

Keppel REIT - Performance Boost From New Acquisitions

Keppel REIT's 1H21 DPU of S$0.0294 broadly in line at 53.6% of our FY21F forecast.
Stable portfolio occupancy amid positive rental reversions.
Reiterate ADD on Keppel REIT with an unchanged DDM-based target price of S$1.29.

Keppel REIT (SGX:K71U) posted a 40.2% y-o-y rise in topline to S$105.8m, thanks to contributions from new acquisitions such as Pinnacle Office Park, Victoria Police Centre and Keppel Bay Tower and higher one-off income and increased JV and associate income, partly offset by lower income from Ocean Financial Centre. As a result, distribution income grew 24.7% y-o-y to S$105.7m, translating to 1H DPU of S$0.0294, +5% y-o-y.
Keppel REIT revalued its portfolio with a valuation increase of 0.5-5.4% at some of its Australian properties due to cap rate compression, moderated by lower valuations for MBFC3.

Portfolio committed occupancy was stable q-o-q at 96.7% at end-1H. Keppel REIT renewed/leased ~721.5k sqft of space in 1H21, of which two-thirds are renewals and achieved an average rental uplift of about 6.9% in 1H. New demand came from financial services, manufacturing and distribution and technology sectors.
As at end-1H21, Keppel REIT had 10.8% of leases to be renewed/reviewed in 2HFY21F and a further 17.3% in FY22F. Expiring rents for 2HFY21F averaged S$10.03psf and S$10.26psf in FY22F.
While we believe lease reversions could remain slightly positive for FY21F given the low expiring rental level, the ability to backfill vacant spaces will be key and potential portfolio frictional vacancy may drag on earnings outlook. Keppel REIT indicated that it granted S$1.6m of tenant reliefs in 1H21 and has also allowed S$0.5m of rents to be deferred. Rental collections remain healthy at 99%.

Keppel REIT’s gearing stood at 38.9% at end-1H. Post divestment of 50% interest in 275 George St in Australia, Keppel REIT’s gearing is likely to decline to 37.4%. All-in interest cost stood at 1.97% at end-1H while 68% of its borrowings are on fixed rates.
With no major refinancing needs in FY21F and better debt headroom, Keppel REIT continues to be in a strong position to continue to evaluate accretive inorganic growth opportunities.

We lower our FY21-23F DPU estimates for Keppel REIT by 4.8-7.3% to factor in income vacuum from divestment of 50% stake in 275 George St, partly offset by interest cost savings, assuming sale proceeds are utilised to repay debt in the near term.
We retain our DDM-based target price of S$1.29 for Keppel REIT.
See
Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions and a better-than-projected office rental market.
Downside risks include longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-28

SGX Stock Analyst Report ADD MAINTAIN ADD 1.290 SAME 1.290