Improving fundamentals, U/G to BUY
KREIT’s 1Q22 distributable income rose 4.3% YoY to SGD53.8m, while NPI
rose 8.6% YoY, as the Keppel Bay Tower acquisition helped offset its 275
George St (Brisbane) divestment in Jul 2021. Office demand tailwinds have
strengthened its fundamentals, and we raise DPUs by 3-5%, on the back of
improving occupancy and accelerating rents. Leasing velocity is strong,
and we see >SGD500m in capital distributions cushioning downtime and
DPUs. We lift our DDM-based TP (COE: 6.6%, LTG: 2.0%) to SGD1.30 from
SGD1.20. With 15% total return, we raise our rating to BUY from HOLD. We
see a favourable risk-reward, at 5.1% FY22E dividend yield and 3.5% 2-year
DPU CAGR, with limited downside from interest rate and cost sensitivities.
Positive leasing, stronger rental reversion outlook
Leasing activity rose to 475k sf (from c.298k sf in 4Q21), with new demand
and expansion led by real estate & property (43%), manufacturing &
distribution (23%), as well as banking, insurance and financial (13%) sector
tenancies. Rental reversion improved to +7.9% in 1Q22, from +1.9% in 2H21
with average signing rents of SGD11.15 psfpm (vs SGD10.56 psfpm in 4Q21
and SGD10.30psfpm in 3Q21). Management guides a mid-to-high singledigit positive rental reversion into FY22, from low-to-mid single-digit,
helped by low SGD10.10 psfpm expiring rents, and backfilling of DBS and
SCB vacancies at Marina Bay Financial Centre.
Peaking vacancies, costs cushioned
Portfolio occupancy was lower at 95.1% (from 95.4% in 4Q21) as One
Raffles Quay fell from 98.5% to 95.8% as an existing tenant moved to a
larger space in the property, with backfilling efforts underway. With 1.9%
of vacancies under documentation, we see occupancy climbing to c.97% in
coming quarters. Utility costs are passed through in Australia and South
Korea, but delivered on fixed-rate contracts in Singapore, with the first
expiring at year-end (vs others in 2023 and 2024), and management
estimates DPUs could fall 1-2% based on current prices.
Gearing healthy, looking to add more
Gearing was stable at 38.7% (vs 38.4% as at end-Dec 2021) while its interest
cost fell to 1.81% (from 1.98% for FY21), with an issuance of a SGD150m 7-
year MTN at 2.07% in Sep 2021. Management lifted its fixed-rate
borrowings to 71% (from 63%), and expects that a 50bps hike in borrowing
cost could lower DPUs by 2.4%. Its balance sheet remains strong, with an
estimated SGD1.5b in debt headroom (at 50% limit). While we expect
management to continue to eye AUM growth in core markets, deal visibility
is low amid interest rate volatility.