FY21 results in line; prefer CICT as reopening trade
KREIT’s FY21 DPU at SGD5.82cts (+1.6% YoY) was in line with our’s and street’s estimates, as contributions from Victoria Police Centre (in Melbourne), Pinnacle Office Park (Sydney) and Keppel Bay Tower (Singapore), helped offset the 275 George Street (Brisbane) divestment in Jul 2021. Office demand tailwinds have strengthened KREIT’s fundamentals, but DPU growth remains unexciting versus peers, as upside from rental recovery is dulled by rising interest costs. Maintain HOLD with a 5% rise in our SGD1.05 DDM-based TP (COE: 7.0%, LTG: 1.0%), as we roll forward to FY22. We prefer CICT (CICT SP, CP SGD2.00, BUY, TP SGD2.55), with catalysts from DPU recovery, and redevelopment upside.
Slow leasing in 4Q21, rents on the rise
Leasing activity eased in 4Q21 to c.298k sf, from c.995k sf in 3Q21 (and versus c.412k sf in 2Q21 and c.310k sf in 1Q21), with new demand and expansion led by financial services (29%), TMT (23%), and manufacturing/ distribution (15%) sector tenancies. Rental reversion was at +1.9% in 2H21, versus +1.0% in 3Q21, with its average weighted signing rents (of SGD10.56 psfpm) higher than 3Q21 (at SGD10.30psfpm). We see Singapore’s Grade A office rental recovery strengthening at +7.0% YoY in 2022, from +3.8% YoY in 2021. Management is guiding for a low-to-mid single-digit positive rental reversion into FY22, helped by its low SGD10.38 psfpm expiring rents, and backfilling of DBS and SCB vacancies at MBFC.
Lower Australia occupancy, set to improve
Occupancies rose at Pinnacle Office Park to 91.5% in 4Q21 (from 90.0% in 3Q21), but fell at 8 Exhibition to 93.7% (from 98.7%), and 8 Chifley Square at 68.6% (from 100%), due to expiring leases and slow leasing, while the Victoria Police Centre and David Malcolm Justice Centre remain fully occupied. In Seoul, strong backfilling at T Tower pushed occupancy from 94.2% to 100%. With lockdowns eased, we expect stronger demand recovery and rental growth prospects for prime grade occupancies across Australia’s office submarkets in FY22.
Gearing healthy, looking to add more
Its Singapore portfolio valuation increased at +0.5% HoH to SGD6.9b, due to stronger rents at MBFC Tower 1 & 2, ORQ, and Keppel Bay Tower, which also saw a tighter cap rate (from 3.60% to 3.55%). Gearing rose to 38.4% (from 37.4%) with the Blue and William acquisition, while interest cost fell slightly to 1.98% for FY21 (from 1.99% in 9M21). Management expects to grow AUM in its core markets, with valuations for assets (in Sydney and Melbourne) having eased on the back of higher leasing risks.