KEPPEL REIT (SGX:K71U)
Keppel REIT - Operating Metrics Remain Strong
- Keppel REIT (SGX:K71U)'s 3Q updates show continued positive momentum in the Singapore office portfolio with healthy occupancy improvement and strong rent growth.
- Outlook remains positive although slightly moderated lower, and should mitigate increasing interest costs’ impact. Service charges are also being raised across all Keppel REIT’s assets to counter higher utility charges.
- Keppel REIT's unitholders will receive additional capital distribution (S$20mil per year over the next 5 years) from past divestment gains, thereby boosting dividends.
Keppel REIT's 3Q22 and 9M22 distributable income rose 1% and 3% y-o-y
- Keppel REIT's 3Q22 and 9M22 distributable income rose 1% and 3% y-o-y, driven by rent growth and acquisitions that were partially offset by lower associate contributions.
- Keppel REIT announced that it will reward unitholders and leading up to its 20th anniversary in 2026, it has set aside S$100m from past capital gains or ~S$0.53 per share per year over the next five years, starting in 2H22 (~S$0.27 for 2H). This will be paid by drawing down debt from its revolving facilities. We are neutral on this move as we believe a targeted share buyback strategy or conserving cash could be a better option under current market conditions.
- Service charges at Marina Bay Financial Centre and One Raffles Quay have been raised by 20% from 3Q22 in light of rising utility charges and there are plans to implement a similar hike across all its Singapore assets in 2023.
Strong operational improvement across its Singapore assets.
- Keppel REIT's portfolio occupancy rose 1.3ppts q-o-q to 96.8%, driven by healthy occupancy improvement across all its Singapore assets but partially offset by slight occupancy decline in Australia and South Korea. Year-to-date rent reversion remains strong at 9.2% (3Q +9.7%), and excluding one large strategic lease, it would have been even higher at ~14% for the quarter.
- Keppel REIT's management remains positive on rent growth outlook in Singapore as demand supply dynamics are still favourable. Physical occupancy (employees returning to the office) has reached a high 70% in Singapore and South Korea but remains low in Australia at 35-45%.
- 72% of Keppel REIT's debt is hedged, with every 50bps increase impacting its DPU by 2.1%. It has S$645m of loans (19%) due for expiry in 1H23 – management expects interest cost to increase by 150-200bps from the existing interest based on a 5-year fixed tenure.
- Currently, 22% and 4% of Keppel REIT's borrowings are in AUD and KRW, providing a natural FX hedge; management also hedges a portion of its FX income 12-18 months forward.
Keppel REIT – Valuation & Recommendation
- We lift FY22-24F DPU forecast for Keppel REIT by 3-4%, factoring in capital top-ups and higher financing charges. We also raise our COE assumptions by 80bps to factor in light of rising cost of capital from a sharp hike in interest rates.
- Keppel REIT's ESG score of 3.2 out of 4.0 is two notches above the country median, as such, we apply a 4% premium to our intrinsic DDM value.
- See
- Keep BUY rating on Keppel REIT, with new S$1.15 target price from S$1.31, 30% upside and 7% yield.
Vijay Natarajan
RHB Securities Research
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https://www.rhbgroup.com/
2022-10-26
SGX Stock
Analyst Report
1.15
DOWN
1.310
