KEPPEL REIT (SGX:K71U)
Keppel REIT - Rents Accelerating
Sound fundamentals, favourable risk-reward
- Keppel REIT (SGX:K71U)’s 1H22 DPU rose 1.2% y-o-y/3.1% h-o-h, as the Keppel Bay Tower acquisition helped offset its divestment of 275 George St. (Brisbane) in Jul 2021 and lower contribution from 8 Chifley Square (Sydney).
- Keppel REIT's fundamentals remain sound, backed by tailwinds in office demand, improving occupancy and accelerating rents. Leasing velocity is strong, and we raised DPUs by 3% to factor in a stronger rental recovery and lower interest costs.
- Risk-reward is favourable at 5.5% FY23E yield, with limited downside from interest rate and cost sensitivities. We raise our DDM-based target price for Keppel REIT (COE: 6.6%, LTG: 2.0%) to S$1.25 from S$1.20. Reiterate BUY.
Higher occupancy, costs cushioned
- Keppel REIT's portfolio occupancy increased to 95.5% (from 95.1% in 1Q22) as strong backfilling at MBFC, 8 Chifley Square and Pinnacle Office Park offset the transitory vacancies at OFC, ORQ and Keppel Bay Tower. Based on leases under documentation, management expects occupancy to climb to ~97% in the coming quarter(s).
- Leasing activity was strong at 407k sf (vs 475k sf in 1Q22) with new demand left by SCB and DBS.
- We think margins are well-cushioned, as Keppel REIT has raised service charges at MBFC and ORQ to offset higher utility costs, while these are passed through in Australia and South Korea.
Positive leasing, stronger rental reversion outlook
- Leasing activity was strong at 407k sf (vs 475k sf in 1Q22) with new demand and expansion led by tech (~20%), financial (~20%) and real estate sector tenancies (~17%). Rental reversion was at +8.7% for 1H22 and +7.5% for 2Q22 with average signing rents higher at S$11.43 psfpm (from S$11.15 psfpm in 1Q22 and S$10.56 psfpm in 4Q21).
- Rents have climbed sharply since May due to tight supply, and management expects a double-digit positive rental reversion into FY22, helped by low S$9.82 psfpm expiring rents, and backfilling of vacancies at MBFC left by SCB and DBS.
Gearing healthy, low interest rate sensitivity
- Keppel REIT's gearing fell to 37.9% (vs 38.7% at end-Mar 2022) while its interest cost was lower at 1.93% (vs 1.98% in FY21).
- Keppel REIT has lifted its fixed-rate borrowings to 73% (from 63%) and refinanced FY22 borrowings, while a 50bps hike in borrowing cost could lower DPUs by 2.4%. Cap rates tightened h-o-h for MBFC (by 15-38bps), and management has not observed expansion for prime CBD assets.
- See
- While we expect Keppel REIT will continue to eye AUM growth in core markets, deal visibility is low amid interest rate volatility.
Chua Su Tye
Maybank Research
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https://www.maybank-ke.com.sg/
2022-07-27
SGX Stock
Analyst Report
1.300
SAME
1.300
