Keppel REIT - RHB Invest 2022-10-26: Operating Metrics Remain Strong


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

Vijay Natarajan RHB Securities Research | https://www.rhbgroup.com/ 2022-10-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.15 DOWN 1.310