Keppel REIT - RHB Invest 2022-04-21: Strengthening Office Outlook; Stay BUY

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KEPPEL REIT (SGX:K71U)

Keppel REIT - Strengthening Office Outlook; Stay BUY

• Keppel REIT (SGX:K71U)’s 1Q results met our expectations. Management is increasingly more optimistic on the Singapore office sector outlook as the demand is strengthening amidst a limited supply. Limited impact is seen from rising utility charges (hedged) and increases in interest rates as it increased its fixed rate loans.
• Potential acquisitions/divestment could likely come from the Australian market.
• Keppel REIT's valuations are attractive at 0.9x P/BV (vs sector’s 1.1x).

Distributable income in 1Q rose 4.3% y-o-y

• Keppel REIT's distributable income in 1Q rose 4.3% y-o-y aided by acquisitions and lower interest costs, translating into an estimated DPU of 1.45 cents, ~24% of our full year forecast.
• Keppel REIT increased its fixed rate loan proportion to 71% (from 63% in 4Q) to minimise the impact from rising rates with a 50bps increase in rates resulting in a negative 2.4% impact to DPU.
• Overall interest costs were lowered 17bps q-o-q to 1.81% pa. About S$0.2m rent rebates were granted in 1Q to ancillary retail tenants.

Utility rates in Singapore are hedged

• Utility rates in Singapore are hedged until the end of this year with staggered expirations: One at the end of 2022 and the others in 2023-2024. Thus, no impact is expected from rising utility charges to Keppel REIT this year with management guiding for ~1% impact to DPU next year, should utility rates remain at the current elevated levels.
• For Australia and South Korea, assets rents are on net basis, with tenants bearing the potential increase in costs.

Positive demand outlook.

• Although portfolio occupancy dipped slightly to 95.1% (4Q: 95.4%), Keppel REIT noted that an additional 1.9% of leases is currently in documentation which should raise occupancy to 97%. Healthy interest is seen for space returned by DBS (SGX:D05) (~75,000sqft) with 25% backfilled and another 55% in advanced discussions.
• Physical occupancy at its Singapore office assets has reached ~60% levels post recent easing measures which allows up to 75% of employees to return of offices.
• About 475,000sqft (+59% q-o-q) of leases were committed in 1Q with 19% being new leases. Demand came mainly from real estate and services, manufacturing and distribution, and banking financial services sectors.

Stronger rent reversion guidance.

• Management expects positive mid to high single digit rent growth for FY22 (from previous low to mid-single digits) on the back of stronger demand and limited supply.
• Keppel REIT also has quite sizeable past divestment gains ( > S$100m) which can be distributed to offset some of the void from the transition period in office leases.

We raise our FY23-24F DPU by 1-2% factoring in higher rents.

• Based on our proprietary in-house methodology, we derive an ESG score of 3.2 out of 4.0 for Keppel REIT, which is two notches above our country median score. As a result, we apply a 4% premium to our intrinsic value to derive our target price.
• See
  • Keppel REIT's Share Price,
  • Keppel REIT's Target Price,
  • Keppel REIT's Analyst Reports,
  • Keppel REIT's Dividend History,
  • Keppel REIT's Announcements,
  • Keppel REIT's Latest News.
• Maintain BUY call on Keppel REIT with a higher target price of S$1.31 from S$1.29, 10% upside and 5.1% yield.

Singapore Research RHB Securities Research | Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2022-04-21

SGX Stock Analyst Report BUY MAINTAIN BUY 1.31 UP 1.250