KEPPEL REIT (SGX:K71U)
Keppel REIT - Steady Improvement In Organic Income; Keep BUY
- Keppel REIT (SGX:K71U) posted another good set of operational numbers (3Q). Overall office demand remains positive despite downsizing and work-from-home trends, as reflected in stable occupancy and positive rent reversions. There is near-term overhang from the paring down of sponsors’ stakes, but we see this as buying opportunity, as it trades at a 20% discount to book value.
- Maintain BUY rating on Keppel REIT with higher S$1.25 target price from S$1.20, 16% upside and 5.6% yield.
3Q distributable income (DI) remained steady q-o-q
- Keppel REIT's 3Q distributable income (DI) remained steady q-o-q while 9-month DI rose 21% y-o-y, mainly on new acquisitions and flow-throughs from positive rent reversions. No capital gains were distributed this year vs S$10m last year. Rent collections remain strong at 99%. Keppel REIT has so far granted rental relief of S$2m and anticipates a further ~S$1m in 4Q with outstanding rent deferrals of S$0.8m. We make no changes to our earnings estimates and expect a 3% CAGR DPU growth in 2020-2024.
Positive guidance on office outlook.
- Portfolio occupancy improved 0.4ppts q-o-q to 97.1%, aided by occupancy improvements mainly across Keppel REIT’s lower assets. However, we expect vacancy to increase slightly in the coming quarters, with DBS (SGX:D05)'s 75,000sqf and Standard Chartered Bank expected to surrender some of their office spaces.
- Management noted that office demand remains strong, driven by tech tenants, co-working operators’ expansions, and some demand from flight-to-quality that offsets the impact of big banks’ downsizing. 9-month and 3Q rent reversions remain positive at +3.3% and +1%, and management expects it to remain positive in 2022. This is because supply remains moderate and expiring rents in 2022 at S$10.38psfpm is still slightly below the current average signing rent of S$10.49psfpm (3Q).
Potential for mergers and redevelopment opportunities.
- Keppel REIT has been actively rejuvenating its portfolio over the last three years, divesting mature assets and redeploying to higher yielding assets here and Australia, which helped boost operational performances. In the near term, we see opportunity for the REIT to jointly redevelop Keppel Towers with a sponsor.
- We also see the possibility of a merger with SPH REIT (SGX:SK6U) if sponsor Keppel Corp (SGX:BN4)'s acquisition of SPH (SGX:T39) is successful. While such a move benefits in terms of scale and diversification, key considerations for unitholders will be pricing and the post-COVID-19 retail landscape.
- See
- Placing good emphasis on ESG criteria with nine of its 10 assets currently green certified and a majority independent board. Based on our proprietary in-house methodology, we derive an ESG score of 3.22 out of 4.0 for Keppel REIT. As this is two notches above our country median, we apply a 4% premium to our intrinsic value to derive our new target price.
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2021-10-26
SGX Stock
Analyst Report
1.25
UP
1.20
