Rent reversion remains positive in 2H

■ 2H/FY21 DPU of 2.88/5.82 Scts is slightly ahead of our expectations at 52.5%/106.1% of our FY21F forecast.
■ Rent reversions remained positive although moderated in 2H21.
■ Reiterate Add rating with an unchanged DDM-based TP of S$1.29.

2H21 results highlights

KREIT reported 2H21 gross revenue of S$110.8m, +16.9% yoy, due to full-year contributions from Victoria Police Centre, Pinnacle Office Park and Keppel Bay Tower as well as capital distribution of S$2m, partly offset by the divestment of 275 George St, lower portfolio occupancy and weaker associate and JV results. 2H21 DPU of 2.88 Scts was 1.7% lower yoy. FY21 DPU of 5.82 Scts is slightly ahead at 106.1% of our forecast.

Lower portfolio occupancy and moderated rent reversion in 2H

Portfolio committed occupancy declined qoq to 95.4% at end-Dec 21, due to lower takeup in its Singapore portfolio and at 8 Exhibition St and 8 Chifley Square in Australia. Management indicated that it expects to improve the committed occupancy of the Singapore portfolio over the next two quarters on the back of robust leasing enquiries. KREIT renewed/leased c.2.02m sqft of space in FY21 (2H: 1.3m sqft) at an average rental uplift of about +3% (2H21: +2%). The bulk of leasing activities in FY21 was in Singapore and average signing rents achieved was S$10.56 psf. New leasing demand came from banking, insurance and financial services, TMT, and manufacturing and distribution sectors. As at end-FY21, KREIT has 16% of gross rent to be renewed/reviewed in FY22F and a further 14.7% in FY23F, the majority coming from Singapore. Management guided that it expects to achieve low- to mid-single digit positive reversions for its FY22F expiries given that expiring rents average S$10.23 psf. While we expect market rents to trend up by 0-5% in FY22F due to limited new supply, potential portfolio frictional vacancy may drag on KREIT’s earnings outlook. In terms of tenant rental waivers, KREIT granted c.S$2.5m of reliefs for FY21.

Focus on growth strategies

KREIT’s aggregate leverage stands at 38.4% as at end-FY21 with average all-in interest cost of 1.98%. An estimated 63% of its debt are on fixed rates. Management guided that a 25bp hike in funding cost could erode its DPU by 0.08 Scts (or c.1.4% of FY21 DPU). With its strong balance sheet, we believe KREIT is in a strong position to continue to evaluate accretive inorganic growth opportunities. Management reiterated its growth strategies which included leveraging the strength of its portfolio, partners and sponsor, improving portfolio operations and sustainability and strengthening capital and risk management.

Reiterate Add rating

We lift our FY22-23F DPU by 3.88-5.56% as we adjust our rent growth assumption to 5% from 0% previously for FY22-23F, partly moderated by higher frictional vacancy at 8 Chifley Square in Australia. We maintain our DDM-based TP of S$1.29. Potential catalysts include a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of office space.