Keppel REIT - UOB Kay Hian 2022-10-26: 9M22 Capital Distribution Mitigates Higher Cost Of Debts


Keppel REIT - 9M22 Capital Distribution Mitigates Higher Cost Of Debts

  • Keppel REIT achieved a strong positive rental reversion of 9.2% in Singapore for 3Q22. Portfolio committed occupancy also improved 1.3ppt q-o-q to 96.8%. Cost of debts rose from 1.9% in 1H22 to about 2.5% in 3Q22.
  • Keppel REIT's management has set aside S$100m from accumulated capital gains to be distributed over the next five years.
  • Keppel REIT provides 2023 distribution yield of 6.5% (CICT: 6.4% and Suntec: 6.4%). P/NAV is attractive at 0.65x. Maintain BUY with a target price of S$1.24.

Keppel REIT (KREIT)'s 9M22 Results

  • Keppel REIT (SGX:K71U) reported distributable income of S$165.4m for 9M22 (+3.4% y-o-y), which is in line with our expectations.
  • Maintains positive growth momentum. Growth was driven by the acquisition of Keppel Bay Tower on 18 May 21, partially offset by the divestment of 275 George Street in Brisbane on 30 Jul 21 and lower contribution from 8 Chifley Square in Sydney. Portfolio occupancy improved 1.3ppt q-o-q to 96.8%.
  • Singapore office occupancy climbing higher. Keppel REIT achieved positive rental reversion of 9.2% for 3Q22. Occupancy at One Raffles Quay (ORQ) improved 6.2ppt q-o-q to 100% due to expansion by a technology tenant. Occupancies at Ocean Financial Centre (OFC) and Keppel Bay Tower (KBT) also improved by 3.3ppt and 2.9ppt q-o-q respectively to 96.1% and 98.2%. Average signing rents were S$11.47psf for 9M22. Tenant retention ratio was healthy at 82%.
  • Keppel REIT has backfilled 75,000sf of space vacated by DBS at MBFC Tower 3. 70% of the 200,000sf space vacated by Standard Chartered Bank at MBFC Tower 1 was backfilled.
  • Pockets of weakness in Australia. Occupancy at 8 Chifley Square in Sydney remains low at 82.0% due to lease expiry by Quantium, which has yet to be backfilled. Occupancy at Pinnacle Office Park in Sydney eased 4.2ppt q-o-q to 88.8% due to downsizing by a tenant providing travel services. Victoria Police Centre in Melbourne maintained full occupancy.
  • Stability from long WALE. Keppel REIT's veighted average lease expiry (WALE) is long at 6.1 years (top 10 tenants: 10.5 years).
  • Resilient balance sheet. Keppel REIT's aggregate leverage increased 0.5ppt q-o-q to 38.4% in 3Q22. It does not have any borrowings maturing in 2H22. Average term to maturity is 2.8 years. Cost of debts rose from 1.9% in 1H22 to about 2.5% in 3Q22.
  • Sensitivity to higher interest rates. Keppel REIT has hedged 72% of borrowings to fixed rates. Management estimated that every 50bp increase in base rates (swap offer rate (SOR)/Singapore overnight rate average (SORA)/bank bill swap rate (BBSW)) will reduce Keppel REIT's DPU by 0.12 cents or 2.1% per year.

Office recovery has strengthened and broadened.

  • According to CBRE, office rents for Grade A core CBD increased 8.9% y-o-y and 2.7% q-o-q to S$11.60psf/month in 3Q22. This is the sixth consecutive quarter of sequential growth and has surpassed the pre-pandemic peak of S$11.55psf/month set in 4Q19.
  • Strength in the office market was driven by the reopening with all employees allowed back to their workplaces since 26 Apr 22. Net absorption was strong at 0.56m sf. Leasing activities were driven by technology companies, flexible workspace operators and non-bank financial institutions. New projects Guoco Midtown and Central Boulevard Towers attracted fresh pre-commitments.

Blue & William on track for practical completion by mid-23.

  • Blue & William, a freehold Grade A office building under development with NLA of 152,126sf located in close proximity to North Sydney Train Station, has reached structural completion in Sep 22. Keppel REIT is in advanced discussions with a few prospective tenants.
  • The developer Lendlease provides a coupon of 4.5% on cumulative progress payment during the development period. Lendlease has provided a 3-year rental guarantee on unlet space after practical completion scheduled in mid-23, which ensures the property is able to provide NPI yield of 4.5%.

Rewarding loyal unitholders with capital distributions.

  • Keppel REIT's management plans to set aside an additional S$100m from accumulated capital gains to be distributed over the next five years to mark its 20th anniversary in 2026. These distributions would be made semi-annually (S$10m every six months).

Coping with higher cost of electricity.

  • Keppel REIT has increased service charges at ORQ and MBFC by 19% to S$1.55psf with effect from Jul 22. It plans to also increase service charges for OFC in Nov 22, followed subsequently by KBT.

Keppel REIT – Earnings forecast revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.24 DOWN 1.330