3Q21: Active leasing, but reversions slowed

  • 3Q21 saw higher revenue and distributable income from operations yoy due to new acquisitions.
  • We expect the positive rental reversions to continue, but also see possible drag from potential frictional vacancy.
  • Reiterate Add, with an unchanged DDM-based TP of S$1.29

3Q21 business update highlights

In its 3Q21 business update, KREIT reported 9M21 gross revenue of S$162.2m, up 34.8% yoy, while distributable income from operations grew 20.8% yoy to S$159.9m. 3Q21 gross revenue came in at S$56.4m (+25.9% yoy) while distributable income from
operations was S$54.2m (+13.9% yoy). 3Q21 revenue and distributable income from operations were broadly within expectations, at 27% of our full-year forecast. The improvement was due to contributions from Victoria Police Centre, Pinnacle Office Park, and Keppel Bay Tower, and partly offset by the divestment of 275 George St in Jul 21.

Higher qoq portfolio occupancy while rental reversion moderated

Portfolio committed occupancy improved slightly qoq to 97.1% at end-3Q21. KREIT renewed/leased 1.717m sq ft of space in 9M21 (3Q21: 996k sq ft) at an average rental uplift of about +3.3% (3Q21: +1%). The bulk of leasing activities was in Singapore and c.75% were renewals/rent reviews. New leasing demand came from banking, insurance and financial services; technology, media and telecom (TMT); manufacturing and distribution; and accounting and consultancy services. As at end-3Q21, KREIT had 2.8% of leases to be renewed/reviewed in 4QFY21F, and a further 16.8% in FY22F. Expiring rents for FY22F averaged S$10.38psf; S$10.87psf for FY23F. While we believe rental reversions could remain slightly positive in FY22F, potential portfolio frictional vacancy may be a drag on its earnings outlook. In terms of tenant rental waivers, KREIT granted c.S$2m of reliefs for 9M21 and has allowed S$0.8m worth of rents to be deferred.

Robust balance sheet

KREIT’s gearing stood at 37.6% at end-3Q21. All-in interest cost stood at 1.99% at end- 3Q21 while 71% of its borrowings were on fixed rates. KREIT has a small 2% of its total debt due to be refinanced in FY22F. As such, we believe the REIT is in a strong position to continue to evaluate accretive inorganic growth opportunities. Management indicated that KREIT would continue to explore opportunities within its current geographic footprint.

Reiterate Add rating

We leave our FY21-23F DPU estimates unchanged and retain our DDM-based TP of S$1.29. Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions and a better-than-projected office rental market. Downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower than- expected backfilling of the office space.