Keppel REIT - RHB Invest 2021-10-26: Steady Improvement In Organic Income; Keep BUY


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.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2021-10-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.25 UP 1.20