Keppel REIT - DBS Research 2021-07-28: Small Setbacks Will Not Derail Growth Plans

KEPPEL REIT (SGX:K71U)

Keppel REIT - Small Setbacks Will Not Derail Growth Plans

Keppel REIT (SGX:K71U) reported decent 1H21 results, largely supported by newly completed / acquired assets; valuation at MBFC Tower 3 declined but Australia and Korea saw cap rates compression.
Keppel REIT's 1H21 DPU +5% y-o-y to 2.94 cents, in line with our estimates, partially due to contributions from newly completed / acquired assets such as Victoria Police Station, Pinnacle Office Park and Keppel Bay Tower and one-off income. No capital distributions were made in 1H21.
2Q21 estimated DPU +5% y-o-y to 1.47 cents.
2Q21 revenue and NPI grew 49% q-o-q and 52% q-o-q respectively, mainly due to contributions from newly completed / acquired assets. On q-o-q, both grew 7% q-o-q each.

Gearing increased to 39% vs 35% in 1Q21. The divestment of 275 George St would reduce gearing further to 37.4%. Average cost of debt continues to decline to 1.97% vs 2.01% in 1Q21 and 2.35% in 4Q20.
Keppel REIT's NAV was stable at S$1.29.

Portfolio occupancy increased marginally by 0.2 ppts q-o-q to 96.7%, mainly from the Singapore assets (+0.4 ppts q-o-q; mainly ORQ and MBFC) and Korea assets (+1.4ppt q-o-q to 100%).
Space occupied previously by UBS at ORQ is now 96% backfilled
Leasing momentum has slowed given the recent tightening of COVID-19 restrictions and work-from-home still as the default mode. However, management hopes that leasing activities will pick-up in 4Q21 when the restrictions are lifted.
Management continues to see demand from tech, financial institutions, non-financial institutions, and professional services.
According to market news, Standard Chartered could be rationalising some 200k sqft of space when its lease expires in Nov 2022. However, management seems confident in backfilling the space (similar to the UBS space), given MBFC is still a desired office location, and on the back of a more optimistic office market next year.
Keppel REIT is currently in advanced negotiations to backfill the Quantium space at 8 Chifley Square but reversions could be slightly negative given the former’s long lease with rental escalations.

In 2Q21, signing rents were higher at S$10.73 psf (weighted average) vs S$10.64 psf in 1Q21, a positive sign in our view.
Keppel REIT continues to record positive rental reversions but lower quantum at 4.1% in 2Q21 vs 10.9% in 1Q21. 1H21 rental reversion is positive at 6.9%
Given expiring rents are slowly creeping up to S$10.03psf in 2021 and S$10.26psf in 2022, management expects rental reversion to remain positive but at a lower quantum.

Keppel REIT continues to look for acquisition and divestment opportunities to optimise its portfolio.
Existing markets like Australia appears to be more favourable given current cap rates. Interestingly, management has added Japan in the list of target markets.

As of mid-year, portfolio valuation (like-for-like basis, ex Keppel Bay Tower, 275 George St) increased by 0.7% vs Dec20.
Singapore portfolio saw a slight decline of 0.2% following a 0.9% decline in MBFC Tower 3 valuations.
Australia portfolio was up 5% largely from 12bps to 13bps cap rates compression from two assets, Pinnacle Office Park and 8 Exhibition St.
Korea’s asset valuation rose by 0.3% following 45bps of cap rates compression offset by lower exchange rates.
Given that office rental rates have stabilised and are trending up, management expects to see valuations trends as sentiment / outlook recovers.

We maintain our BUY rating and target price of S$1.40. We raised our FY21F DPU estimates by 0.7% to factor in the recent asset acquisition and divestments. We estimate core DPU 2-year CAGR of ~3%. We believe Keppel REIT’s best-in-class office portfolio is well positioned to benefit from potential recovery in a very tight net supply. Keppel REIT currently trades at ~4.8% yield and 0.9x P/NAV.
See

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-07-28

SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400