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


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.

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