KEPPEL REIT (SGX:K71U)
Keppel REIT - 1H21 Resurgence Of Growth From Newly Completed & Acquired Buildings
- We see resurgence of growth with Keppel REIT’s distributable income expanding 24.7% y-o-y in 1H21 if we exclude capital gains distribution. Keppel REIT benefitted from contributions from Victoria Police Centre in Melbourne, Pinnacle Office Park in Sydney and newly acquired Keppel Bay Tower. It achieved positive rental reversion of 4.1% in 2Q21.
- Keppel REIT provides 2022 distribution yield of 5.1%, which is attractive for a pure play office REIT. Maintain BUY. Target price: S$1.49.
Keppel REIT's 1H21 Results
- Keppel REIT (SGX:K71U) reported 1H21 DPU of 2.94 cents (+5.0% y-o-y), which is in line with our expectations. Distributable income would have increased 24.7% y-o-y if we exclude capital gains distribution from 1H20.
- Growth from development project and acquisitions. NPI attributable to unitholders increased 50.3% y-o-y in 1H21 due to contributions from Victoria Police Centre in Melbourne (practical completion on 9 Jul 20), Pinnacle Office Park in Sydney (acquisition completed on 31 Dec 20) and Keppel Bay Tower (acquisition completed on 18 May 21). Contributions from associates and JVs increased 14.6% y-o-y in 1H21 due to lower cost of debts and appreciation of the Australia dollar. There was one-off income of S$4.3m from Marina Bay Financial Centre (MBFC) and One Raffles Quay (ORQ) for pre-termination and the re-instatement of leases.
- Singapore: Maintains positive rental reversion. Positive rental reversion moderated from 10.9% in 1Q21 to 4.1% in 2Q21. Average signing rents for Singapore office leases increased 1.8% q-o-q to S$10.83psf, which is above S$10.50psf for Grade-A office space within core CBD. Banking, insurance & financial services, manufacturing & distribution and manufacturing & distribution accounted for 36.2%, 29.5% and 20.3% of new leasing demand respectively. We expect Keppel REIT to maintain positive rental reversion because average expiring rents are low at S$10.03psf in 2H21 and S$10.26psf in 2022.
- Portfolio occupancy edged marginally higher by 0.2ppt q-o-q to 96.7%. Committed occupancy at ORQ improved 2.8ppt q-o-q to 98.3% as replacement tenants for UBS gradually started to contribute (96% of space vacated is already committed). Committed occupancy at Ocean Financial Centre (OFC) eased 1.8ppt q-o-q to 96.5% due to natural expiry (one floor). Committed occupancy at T Tower in Seoul improved 1.4ppt q-o-q to 100%. Weighted average lease expiry (WALE) remains long at 6.2 years (top 10 tenants: 11.2 years).
- Mid-year valuation exercise. Keppel REIT conducted an independent mid-year valuation of all its properties. Valuation of MBFC Tower 3 was reduced by S$12m or 0.9% due to potential occupancy changes and lower rental assumptions. Valuations for other office buildings in Singapore were unchanged. Excluding 275 George Street, valuation of its Australia portfolio increased S$69.2m or 4.9% due to cap rate compression.
- All-in cost of debts was reduced by 0.51ppt y-o-y to 1.97%. Aggregate leverage was 38.9%. Aggregate leverage would be lower at 37.4% if proceeds from the divestment of 275 George Street were utilised to repay borrowings. Interest coverage ratio has improved to 4.0x, compared to 3.1x last year.
STOCK IMPACT
- Grade A offices within core CBD benefitting from flight to quality. According to CBRE, some landlords have started to push for higher rents for better-performing buildings. Rents for Grade-A core CBD increased 1% q-o-q to S$10.50psf/month, the first increase since 4Q19. Vacancy rates for Grade-A core CBD remain low at 4.4%. The Grade-B market continued to struggle to backfill vacant space. Rents for Grade-B islandwide dropped 0.7% q-o-q to S$7.15psf/month. Chinese technology giants that are expanding in Singapore include Tencent and ByteDance. Hedge fund Citadel and investment management company Hamilton Lane have also recently set up their offices in Singapore.
- Leasing momentum could pick up again in 4Q21. The multi-ministry taskforce has tightened community safe management measures back to Phase 2 (Heightened Alert) from 22 July to 18 August. Leasing momentum has slowed and physical occupancy of office buildings has dropped to 20%. The government has set a new target to have 75% of the population fully vaccinated by October. Achieving the important milestone could pave the way for social distancing measures to be substantially eased.
- Long WALE provides income stability Down Under. Both Sydney and Melbourne are in lockdown due to outbreaks of the Delta variant. Occupancy and rents for the Australia portfolio (16.9% of AUM) could come under some pressure in the near term but the negative impact is cushioned by long WALE of 11.2 years.
- Keppel REIT has completed the acquisition of 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%), on 18 May 21. Keppel Bay Tower is a Grade-A office building located in the HarbourFront area, which is part of the 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.
- Asset recycling and portfolio optimisation. Keppel REIT has entered into contract of sale to divest 50% interest in 275 George Street in Brisbane, Australia for a sale consideration of A$275m on 30 Jun 21. The buyer is Charter Hall Prime Office Fund, which owns the other 50% interest. 275 George Street is a 31-storey freehold office building located in Brisbane’s CBD with NLA of 41,720sqm. The adjusted consideration of A$264m is 8% above the last valuation of A$245m and 59% above the original purchase price of A$166m in 2010. Exit NPI yield is attractive at 3.6%. Keppel REIT is expected to recognise an estimated divestment gain of A$9.8m (S$10.0m). The divestment is expected to be completed in 3Q21.
EARNINGS REVISION
- We maintain our existing DPU forecast.
VALUATION/RECOMMENDATION
- Our target price of S$1.49 is based on DDM (cost of equity: 5.5%, terminal growth: 1.5%).
- See
SHARE PRICE CATALYST
- Positive rental reversion for office properties in Singapore.
- ictoria Police Centre (311 Spencer Street) in Melbourne and Park in Sydney in 2021.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-07-28
SGX Stock
Analyst Report
1.490
SAME
1.490
