Keppel REIT - UOB Kay Hian 2022-04-21: 1Q22 Portfolio Occupancy Boosted By Pick-Up In Leasing Activities


Keppel REIT - 1Q22 Portfolio Occupancy Boosted By Pick-Up In Leasing Activities

  • Property income and NPI grew 6.7% and 9.9% y-o-y respectively in 1Q22 due to the acquisition of Keppel Bay Tower, which was completed on 18 May 21. Keppel REIT has signed letters of intent with a few prospective tenants and is in the midst of finalising lease documentation. If successfully signed, these new leases would improve portfolio occupancy by 1.9ppt to 97%.
  • Keppel REIT provides 2022 distribution yield of 5.0% (CapitaLand Integrated Commercial Trust (SGX:C38U): 5.0%, Suntec REIT (SGX:T82U): 5.1%). Maintain BUY.

Keppel REIT's 1Q22 Results

  • Keppel REIT (SGX:K71U) reported distributable income of S$53.8m (+4.3% y-o-y) for 1Q22, which is in line with our expectations.
  • Growth from Singapore. NPI attributable to unitholders increased 9.9% y-o-y in 1Q22 due to contributions from Keppel Bay Tower in Singapore (acquisition completed on 18 May 21), which was partially offset by the divestment of 275 George Street in Brisbane (divestment completed on 30 Jul 21). Contributions from associates and JVs decreased 11.7% y-o-y due to transitional vacancy at One Raffles Quay (ORQ) and Marina Bay Financial Centre (MBFC).
  • Achieved strong positive rental reversion. Leases committed amounted to 222,500sf (attributable) and Keppel REIT achieved positive rental reversion of 7.9% in 1Q22. Average signing rents for Singapore office leases was S$11.15psf in 1Q22 (2021: S$10.56psf). New leasing demand and expansion were mainly from banking, insurance & financial services (30%), government agency (15.2%) and technology, media & telecommunications (12.9%). Retention rate was healthy at 91%. Management guided positive rental reversion at mid-to-high single digit for 2022 as average expiring rents for Singapore office is low at S$10.10.
  • Portfolio committed occupancy eased marginally by 0.3ppt q-o-q to 95.1%, primarily due to ORQ where occupancy dropped 2.7ppt q-o-q to 95.8%. Keppel REIT has backfilled one quarter of the space vacated by DBS (SGX:D05) at MBFC Tower 3 with positive rental reversion at double digits. It is talking to another tenant for about half of the space vacated by DBS. Keppel REIT has signed letters of intent with a few prospective tenants during February and March, and is in the midst of finalising lease documentation. If successfully signed, these new leases would ve portfolio occupancy by 1.9ppt to 97%.
  • Weighted average lease expiry (WALE) is long at 6.1 years (top 10 tenants: 10.7 years).
  • Resilient balance sheet. Aggregate leverage edged higher by 0.3ppt q-o-q to 38.7% in 1Q22. All-in interest rate improved 17bp q-o-q to 1.81%. Keppel REIT has diversified its funding source with the issuance of S$150m 7-year medium term notes at 2.07% in Sep 21. Green loans accounted for 48% of total borrowings. It redeemed S$146.5m of 1.9% convertible bonds due in 2024, funded by loan facilities that mature in 2026 and 2027. Keppel REIT’s average term to maturity is 3.1 years.
  • Keppel REIT has increased the proportion of borrowings hedged into fixed interest rates from 63% to 71%. Management estimated that every 50bp increase in interest rates will reduce DPU per year by 2.4% or 0.14 cents. Assuming that the Fed Funds Rate averages 2.5% in 2023, we estimate that average cost of debt will increase to 2.55%.

Leasing momentum turning more positive.

  • Leasing activities have picked Grade A core CBD to increase by 6.9% to S$11.55psf/month.

Long WALE provides income stability down under.

  • Sydney and Melbourne have emerged from lockdowns and lifted COVID-19 restrictions in Oct 21. Australia has fully reopened its international borders in Feb 22. Leasing enquiries have picked up but rents are under pressure due to high vacancy rates of 11.6% for Sydney and 15.3% for Melbourne CBD. Management believes vacancy rate and tenant incentives have peaked. The Australia portfolio (18.2% of AUM) provides stable income due to the long WALE of 13.3 years.
  • Rewarding unitholders with distribution of capital gains. Management will consider distributing divestment gains of S$500m accumulated in the past to unitholders.

Minimal impact from rising cost of electricity.

  • Keppel REIT has four supply contracts for electricity on fixed rates for its four office buildings in Singapore. One supply contract is expiring at end-22 and the remaining three at end-23 and end-24. The impact of higher cost of electricity is muted in 2022 and is more significant in 2024. Its leases for Australia and South Korea are triple net with cost of electricity borne by tenants.

Keppel REIT - Earnings forecast revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-21
SGX Stock Analyst Report BUY MAINTAIN BUY 1.50 DOWN 1.520