KEPPEL REIT (SGX:K71U)
Keppel REIT 9M21 - The Hunter Or The Hunted?
- Keppel REIT’s 9M21 business update was in line with our expectations. Rental reversion weakened to just +1% in 3Q21 but committed occupancy edged higher by 0.4ppt q-o-q to 97.1%.
- We postulate that SPH REIT (SGX:SK6U) could be the acquirer and Keppel REIT the acquiree in the merger between the two S-REITs to prevent conflict of interest. SPH REIT has a larger debt head room of S$667m based on aggregate leverage at 4 % and lower cost of debt at 1.84%.
- Maintain BUY with a lower target price.
Keppel REIT's 9M21 Results
- Keppel REIT (SGX:K71U)’s reported distributable income from operations of S$159.9m for 9M21 (+20.8% y-o-y), which is in line with our expectations.
- Growth from Singapore and Australia. NPI attributable to unitholders increased 42.6% y-o-y in 9M21 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 in Singapore (acquisition completed on 18 May 21), partially offset by the divestment of 275 George Street in Brisbane (divestment completed on 30 Jul 21). Contributions from associates and JVs increased 5.9% y-o-y due to lower cost of debt, one-off income of S$0.5m and appreciation of the A$.
- Singapore: Rental reversion affected by renewal for retail space. Positive rental reversion moderated from 10.9% in 1Q21 to 4.1% in 2Q21 and 1% in 3Q21. Rental reversion for 9M21 of 3.3% was affected by the renewal for ancillary retail space in its office buildings located downtown. Excluding retail space, rental reversion was positive 4.2% for office space in 9M21. Average signing rents for Singapore office leases was S$10.49psf in 9M21 (1H21: S$10.73psf). Banking, insurance & financial services, technology, media & telecom and manufacturing & distribution accounted for 34.5%, 22% and 18.4% of new leasing demand respectively in 9M21.
Portfolio committed occupancy edged higher
- Keppel REIT's portfolio committed occupancy edged higher by 0.4ppt q-o-q to 97.1%. Occupancy at One Raffles Quay (ORQ) to pare down debts. Interest coverage ratio has improved to 3.9x, compared with 3.1x last year. Keppel REIT issued S$150m of 7-year medium-term notes at 2.07% in Sep 21.
Committed to ESG excellence.
- Keppel REIT retained its 4 Star Tower, 8 Exhibition Street and Victoria Police Centre are fully powered by renewable energy.
Grade A offices within core CBD benefitting from lack of supply.
- According to CBRE, rents for Grade A core façade would be completed by end-21. Renovation for the lobby areas would be completed by 2Q22. Management estimated Keppel REIT’s share of the capex for the AEI at A$3m.
Keppel REIT - Valuation & Recommendation
- We maintain our existing DPU forecast. Maintain cost of debt of 1.84% compared with Keppel REIT’s 1.99%. Thus, SPH REIT has a greater chance of making the acquisition yield accretive by deploying more debts. Keppel REIT could be the acquiree.
- See
- Catalyst: Full-year contributions from Victoria Police Centre (311 Spencer Street) in Melbourne and Pinnacle Office Park in Sydney in 2021. Keppel Bay Tower will provide full-year contribution in 2022.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-10-27
SGX Stock
Analyst Report
1.25
DOWN
1.490
