FY21 Results Analysis: The Force Awakens

  • FY21 DPU up 1.6% y-o-y to 5.82 Scents, in line. Underlying DPU is estimated to grow by +7% y-o-y.  
  • Key positives: i) rental reversions stayed positive and expected to remain positive in FY2022, ii) management seeing encouraging leasing interests and expansion demand to relocate regional roles, iii) CEO’s new three-pronged strategy to drive future growth, iv) MSCI ESG Rating upgraded to ‘A’ from ‘BBB’. 
  • Key negatives: i) portfolio occupancy declined but some vacancies were expected. 
  • Maintain BUY; TP of S$1.40. Best-in-class and last remaining office pure play in Singapore. Valuation remains attractive at c.5.2% FY22F yield and 0.9x P/NAV

We will be hosting KREIT’s FY2021 post results investor call tomorrow, 26 Jan @ 4pm (SGT). 

Summary of results (S$’m)4Q20213Q2021%q-o-q4Q2020% y-o-yFY2021FY2020% y-o-y
Income contribution from JV28.128.4-1%32.1-12.5%118.6117.61%
DPU (est for quarterly)1.411.47-4%1.53-7.8%5.825.732%
Gearing38.4%37.6%0.8 ppt37.3%1.1 ppt38.4%37.3%1.1 ppt
Average cost of debt1.98%1.99%0 ppt2.35%-0.4 ppt1.97%2.35%-0.4 ppt

Source: Company, DBS

FY21 underlying DPU (ex-capital distribution) is estimated to grow by c.6% y-o-y, implying improvement in underlying portfolio performance. 

  • FY21 estimated DPU +1.6% y-o-y to 5.82 Scents, in line with our estimates of 5.80 Scents, mainly due to full-year contributions from Victoria Police Station, Pinnacle Office Park and Keppel Bay Tower (acquired in May21). This is partially offset by the divestment of 275 George St in Jul’21 and lower occupancies.
  • FY21 underlying DPU (ex-capital distribution) is estimated to grow by +6.5% y-o-y. 
  • 4Q21 estimated DPU was down 7.8% y-o-y to 1.41 Scents, possibly due to one-off income relating to Victoria Police Centre and the divestment of 275 George St.
  • 4Q21 revenue and NPI fell 4% q-o-q and 22% respectively possibly due to lower occupancies largely from 8 Chifley Square, 8 Exhibition Street, OFC and MBFC.
  • Gearing increased to 38.4% vs 37.6% in 3Q21, post the acquisition of Blue & William. Average cost of debt inched down marginally to 1.98% vs 1.99% in 3Q21 and 2.35% in 4Q20. 
  • NAV inched up marginally to S$1.29 vs S$1.28 in 3Q21 with the inclusion of Blue & William. 

Key Highlights

Key Operational Data4Q20213Q2021%q-o-q4Q2020% y-o-y
Portfolio occupancies95.4%97.1%-1.7 ppt 97.9%-2.5 ppt 
– SG (based on simple average, ex Keppel Bay Tower)96.3%97.6%-1.3 ppt 97.4%-1.1 ppt 
– AU (based on simple average)90.8%97.7%-6.9 ppt 98.8%-8 ppt 
– KR99.4%94.2%5.2 ppt 98.6%na
WALE (years)
– SG2.80nana2.90-0.1
– AU13.60nana12.800.8
– KR2.30nana2.000.3
Weighted av signing rents (S$psf pm)     
– SG10.5610.491%11.02-4.2%
Lease expiries/Rent Reviews in FY2022 by Committed Attributable NLA14.7%16.8%-2.1 ppt 16.8%-2.1 ppt 
– Expiring leases14.7%16.8%-2.1 ppt 16.8%-2.1 ppt 
– Rent review leases  0 ppt   0 ppt 
Lease expiries/Rent Reviews in FY2023 by Committed Attributable NLA13.9%13.7%0.2 ppt0.0%13.9 ppt
– Expiring leases13.6%13.4%0.2 ppt12.5%1.1 ppt
– Rent review leases0.3%0.3%0 ppt0.2%0.1 ppt
Rental Reversions (*4Q21 reversion is for 2H21)2.0%1.0%1 ppt12.7%-10.7 ppt

Source: Company, DBS

(-/+) Despite decline in occupancy (some expected), management is seeing encouraging leasing momentum and expects to announce positive news in the next quarter or two. 

  • Portfolio occupancy moderated by 1.7 ppt q-o-q to 95.4% mainly from the Singapore assets (-1.3 ppt q-o-q; mainly in OFC, MBFC and Keppel Bay Tower) and Australia assets (-6.9ppt q-o-q; mainly from 8 Chifley Square – expected vacancy from Quantium’s departure – and 8 Exhibition St). 
  • The lower occupancy at OFC was due to renewal on a downsized space while 8 Exhibition St’s tenant requested for early release.
  • T Tower saw occupancy improved close to full occupancy at 99.4% from 94.2% in 3Q21 in line with management’s guidance to backfill the vacancy soon. 
  • Management saw improved leasing interests at the start of the new year and continues to work towards backfilling (potential) vacancy at MBFC from DBS and Standard Chartered. Management believes they could reveal positive leasing news soon in the next quarter or two. 
  • Similarly in Australia, management saw fairly firm interests with repeat viewings from large space users despite a quiet Christmas period in Dec21. AEI at 8 Chifley Square is ongoing and expected to enhance the building to drive occupancy.
  • Physical occupancy have improved across all countries, a positive sign of return-to-office. Singapore clocks in 50% to 60% physical occupancy, Perth c.80% and Sydney 20% to 40%. 
  • Management continues to see demand from financial institutions, tech and family offices. Interestingly, while there are some rationalisation of spaces, tenants (mainly from financial institutions) are expanding to relocate regional roles to their Singapore office. We believe Singapore will continue to benefit as a go-to location given the tight border restrictions in Hong Kong, in our view.

(+) Positive rental reversions and expect FY22F to record positive low- to mid-single digit reversions.

  • In 4Q21, signing rents turned up to S$10.56 vs S$10.49 (including rent review) in 3Q21 vs S$10.73 psf in 2Q21. 
  • KREIT recorded 2H21 rental reversions of +2% and we estimate 4Q21 reversions were positive (+1% in 3Q21). FY21 rental reversion is +3%, contributed by SG +2.8%, AU +10% and KR +8.6%. 
  • Management continue to expect to record low- to mid-single digit positive rental reversions in FY2022. Average expiring rents are still below average signing rents at S$10.35 in FY2022, S$10.84 in FY2023 and S$10.67 in FY2024.

(+) New CEO sets his three-pronged strategy focusing on growth, future sustainability and balancing with capital management. 

  • New CEO Wee Lih expressed his three-pronged strategy moving forward i) growth – leveraging on the existing strength of the portfolio partnership and sponsor to grow organically and inorganically, ii) portfolio optimisation and sustainability – continue on KREIT’s portfolio optimisation and setting ambitious sustainability targets for the future, iii) capital and risk management – managing the expectation of interest rate hikes. 
  • KREIT will continue the balance between utilising capital gains to support distribution and redeployment into accretive assets.

(+) Going big on ESG with an upgraded MSCI ESG Rating to ‘A’ from ‘BBB’

  • In Dec 21, KREIT’s MSCI ESG Rating was upgraded to ‘A’ from ‘BBB’ and is the only SREIT to have all its Singapore office assets certified BCA Green Mark Platinum, another testament to the quality of its portfolio. 
  • Going forward, KREIT sets ambitious ESG targets in the medium-term and is committed in its drive towards an equitable and sustainable future. 

(+) Overall valuation was relatively flat; Singapore +0.5% due to higher rental rates and 5bps compression in cap rates, higher valuation in Australia and Korea were offset by exchange rate

  • Overall valuation of properties (excluding Blue & William) was relatively flat vs valuation as at Jun21. 
  • Singapore portfolio valuation increased by 0.5% mainly from MBFC and ORQ due to higher rental rates while Keppel Bay Tower saw a 5bps compression in cap rates. 
  • Australia portfolio (excluding Blue & William) +3.2% in local currency but was offset by exchange rate (Valuation in SG$ -1.7%). Victoria Police Station saw cap rate compression of 12bps.
  • Similar to Australia, Korea saw higher valuation from higher renewed rents and transacted prices in the CBD but was impacted by exchange rate (SG$ valuation -0.7%). 

Maintain our BUY rating; TP of S$1.40. We believe KREIT’s best-in-class office portfolio is well positioned to ride on the recovery in office rents and return-to-office. Given the recent commercial SREITs merger, KREIT is the last remaining office pure play which we believe investors will eventually favour and assign a premium to its unique attribute. Valuation remains attractive at c.5.2% FY22F yield and 0.9x P/NAV.