1Q22: Portfolio Occupancy Boosted By Pick-up In Leasing Activities
Property income and NPI grew 6.7% and 9.9% yoy respectively in 1Q22 due to the
acquisition of Keppel Bay Tower, which was completed on 18 May 21. KREIT has
signed letters of intent with a few prospective tenants and is in the midst of finalising
lease documentation. If successfully signed, these new leases would improve portfolio
occupancy by 1.9ppt to 97%. KREIT provides 2022 distribution yield of 5.0% (CICT:
5.0%, Suntec: 5.1%). Maintain BUY with target price of S$1.50.
RESULTS
• Keppel REIT (KREIT) reported distributable income of S$53.8m (+4.3% yoy) for 1Q22,
which is in line with our expectations.
• Growth from Singapore. NPI attributable to unitholders increased 9.9% yoy in 1Q22 due to
contributions from Keppel Bay Tower in Singapore (acquisition completed on 18 May 21),
which was partially offset by the divestment of 275 George Street in Brisbane (divestment
completed on 30 Jul 21). Contributions from associates and JVs decreased 11.7% yoy due
to transitional vacancy at One Raffles Quay (ORQ) and Marina Bay Financial Centre
(MBFC).
• Achieved strong positive rental reversion. Leases committed amounted to 222,500sf
(attributable) and KREIT achieved positive rental reversion of 7.9% in 1Q22. Average
signing rents for Singapore office leases was S$11.15psf in 1Q22 (2021: S$10.56psf). New
leasing demand and expansion were mainly from banking, insurance & financial services
(30%), government agency (15.2%) and technology, media & telecommunications (12.9%).
Retention rate was healthy at 91%. Management guided positive rental reversion at mid-tohigh single digit for 2022 as average expiring rents for Singapore office is low at S$10.10.
• Portfolio committed occupancy eased marginally by 0.3ppt qoq to 95.1%, primarily due
to ORQ where occupancy dropped 2.7ppt qoq to 95.8%. KREIT has backfilled one quarter of
the space vacated by DBS at MBFC Tower 3 with positive rental reversion at double digits. It
is talking to another tenant for about half of the space vacated by DBS. KREIT has signed
letters of intent with a few prospective tenants during February and March, and is in the
midst of finalising lease documentation. If successfully signed, these new leases would
improve portfolio occupancy by 1.9ppt to 97%.
• Weighted average lease expiry (WALE) is long at 6.1 years (top 10 tenants: 10.7 years).
• Resilient balance sheet. Aggregate leverage edged higher by 0.3ppt qoq to 38.7% in 1Q22.
All-in interest rate improved 17bp qoq to 1.81%. KREIT has diversified its funding source
with the issuance of S$150m 7-year medium term notes at 2.07% in Sep 21. Green loans
accounted for 48% of total borrowings. It redeemed S$146.5m of 1.9% convertible bonds
due in 2024, funded by loan facilities that mature in 2026 and 2027. KREIT’s average term to
maturity is 3.1 years.
• KREIT has increased the proportion of borrowings hedged into fixed interest rates from 63%
to 71%. Management estimated that every 50bp increase in interest rates will reduce DPU
per year by 2.4% or 0.14 S cents. Assuming that the Fed Funds Rate averages 2.5% in
2023, we estimate that average cost of debt will increase to 2.55%.
STOCK IMPACT
• Leasing momentum turning more positive. Leasing activities have picked up in 1Q22.
Working from home is no longer the default and 50% of employees were allowed back to
their offices starting Jan 22. Physical occupancies at KREIT’s office properties should further
improve as 75% of employees have been allowed back to their offices starting Apr 22.
• Singapore a thriving hub for technology and financial services. According to CBRE,
office rents for Grade A core CBD increased 3.8% to S$10.80psf/month in 2021. Net
absorption has reversed from negative 0.07m sf in 1H21 to positive 0.59m sf in 2H21.
Demand was driven by technology companies and non-bank financial institutions, such as
private wealth and asset managers despite companies adopting hybrid working
arrangements. The two sectors accounted for 52% of leasing volume. Occupancy for Grade
A core CBD inched higher by 1.2ppt to 93.3% in 2H21 due to the flight to quality.
• Grade A offices within Singapore’s core CBD benefitting from lack of supply.
According to CBRE, total supply of office space in Singapore is estimated at 3.76m sf over
the next three years (2022-24), which is equivalent to 1.25m sf per year and 13.4% below
the 10-year historical average new supply of 1.45m sf. New supply is expected to pick up in
2023 assuming IOI Central Boulevard Towers is completed on schedule in 4Q23. CBRE
expects office rents for Grade A core CBD to increase by 6.9% to S$11.55psf/month.
• Long WALE provides income stability down under. Sydney and Melbourne have
emerged from lockdowns and lifted COVID-19 restrictions in Oct 21. Australia has fully
reopened its international borders in Feb 22. Leasing enquiries have picked up but rents are
under pressure due to high vacancy rates of 11.6% for Sydney and 15.3% for Melbourne
CBD. Management believes vacancy rate and tenant incentives have peaked. The Australia
portfolio (18.2% of AUM) provides stable income due to the long WALE of 13.3 years.
• Rewarding unitholders with distribution of capital gains. Management will consider
distributing divestment gains of S$500m accumulated in the past to unitholders.
• Minimal impact from rising cost of electricity. KREIT has four supply contracts for
electricity on fixed rates for its four office buildings in Singapore. One supply contract is
expiring at end-22 and the remaining three at end-23 and end-24. The impact of higher cost
of electricity is muted in 2022 and is more significant in 2024. Its leases for Australia and
South Korea are triple net with cost of electricity borne by tenants.
EARNINGS REVISION
• We trim our 2023 DPU forecast by 3% after factoring in higher average cost of debt.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.50 is based on DDM (cost of equity: 5.5%, terminal
growth: 1.5%).
SHARE PRICE CATALYST
• Keppel Bay Tower will provide full-year contribution in 2022.
• Practical completion of Blue & William in mid-23.