1Q2022 Business Update: The force is strong in you.
- 1Q22 estimated DPU grew 4% y-o-y, in line, mainly from newly acquired asset Keppel Bay Tower (May21) partially offset by the divestment of 275 George St (Jul21).
- Key positives: i) vacancies are majority backfilled and occupancy to hit 97% including prospective leases under documentation, ii) Strong 1Q22 reversions and more optimistic outlook, iii) utility cost locked in for 2022, iv) strong office market in Singapore while Australia is recovering.
- Key negatives: i) may see rise in utility cost post 2022 if energy rates were to remain high in 2023, ii) potential rise in interest rates costs on debt with floating rates
- Maintain BUY; TP of S$1.40. Best-in-class and last remaining office pure play poised to ride on the rising office market in Singapore. Valuation remains attractive at c.5% FY22F yield and 0.9x P/NAV
| Summary of results (S$’m) | 1Q2022 | 4Q2021 | %q-o-q | 1Q2021 | % y-o-y |
| Revenue | 54.5 | 54.4 | 0% | 51.1 | 6.7% |
| NPI | 44.2 | 34.9 | 27% | 40.7 | 8.6% |
| Income contribution from JV | 28.8 | 28.1 | 2% | 32.6 | -11.7% |
| DI | 53.8 | 52.2 | 3% | 51.6 | 4.3% |
| DPU (est for quarterly) | 1.46 | 1.41 | 4% | 1.47 | -0.8% |
| Gearing | 38.7% | 38.4% | 0.3 ppt | 35.2% | 3.5 ppt |
| Average cost of debt | 1.81% | 1.98% | -0.2 ppt | 2.01% | -0.2 ppt |
| ICR | 3.8 | 3.9 | (0.1) | 3.7 | (3.8) |
Source: Company, DBS
| Key Operational Data | 1Q2022 | 4Q2021 | %q-o-q | 1Q2021 | % y-o-y |
| Portfolio occupancies | 95.1% | 95.4% | -0.3 ppt | 96.5% | -1.4 ppt |
| – SG (based on simple average, ex Keppel Bay Tower) | 95.6% | 96.3% | -0.7 ppt | 96.5% | -0.9 ppt |
| – AU (based on simple average) | 90.8% | 90.8% | 0 ppt | 96.1% | -5.3 ppt |
| – KR | 100.0% | 99.4% | 0.6 ppt | 98.6% | na |
| WALE (years) | 6.10 | 6.10 | 0.0 | 6.70 | -0.6 |
| – SG | 2.90 | 2.80 | 0.1 | n/a | #VALUE! |
| – AU | 13.30 | 13.60 | -0.3 | n/a | #VALUE! |
| – KR | 2.00 | 2.30 | -0.3 | n/a | #VALUE! |
| Weighted av signing rents (S$psf pm) | |||||
| – SG | 11.15 | 10.56 | 6% | 10.64 | 4.8% |
| Lease expiries/Rent Reviews in FY2022 by Committed Attributable NLA | 9.3% | 14.7% | -5.4 ppt | 16.4% | -7.1 ppt |
| – Expiring leases | 9.3% | 14.7% | -5.4 ppt | 16.4% | -7.1 ppt |
| – Rent review leases | 0 ppt | 0 ppt | |||
| Lease expiries/Rent Reviews in FY2023 by Committed Attributable NLA | 13.9% | 13.9% | 0 ppt | 12.7% | 1.2 ppt |
| – Expiring leases | 13.6% | 13.6% | 0 ppt | 12.5% | 1.1 ppt |
| – Rent review leases | 0.3% | 0.3% | 0 ppt | 0.2% | 0.1 ppt |
| Rental Reversions (*4Q21 reversion is for 2H21) | 7.9% | 2.0% | 5.9 ppt | 10.9% | -3 ppt |
Source: Company, DBS
Key highlights / observations.
Vacancies largely backfilled; strong reversions; minimal impact on rising utility costs; strong Singapore office market while Australia is recovering.
- Vacancies are largely backfilled and expects occupancy to rise to 97% when 1.9% of lease under documentation currently are fully committed. i) DBS space is more than 25% backfilled and expect to hit 70% when prospective leases which are currently under documentation phase are fully committed, ii) Quantium space is 25% committed with another 25% is currently undergoing documentation phase, iii) receiving interests for SCB’s space
- 1Q2022 rental reversions at 7.9% and expect full year to likely record mid to high single digit. Strong 1Q2022 likely led by double digit reversions at DBS space. Signing rents are ranging between S$11psf to above S$12psf. Management is more optimistic on Singapore office market and expects full year reversions could be mid- to high-single digit (vs low- to mid-single digit in previous guidance).
- With the reopening in Singapore, sentiment has become more optimistic and demand has improved. Demand is still coming from tech and non-bank financial institutions. Management estimates that c.50% of new leases signed are expansionary demand (c.10% of leases signed) and there are instances where financial institutions, who had previously downsized their office space are now asking for more space.
- The office market in Australia is also recovering with improved sentiment post reopening and management believes that vacancies and TIs is bottoming out. 8 Chifley Square has received strong interests and expect the vacancy could be largely backfilled soon.
- Lower all-in average cost of debt due to early refinancing but may see some impact from 29% unhedged debt and potential refinancing of debt expiring in 2023 / 2024, in our view. KREIT has refinanced some of the expiring loans early and thus have brought down all-in average cost of debt to 1.81% vs 1.98% in 4Q21. Based on 50bps rise in floating rates (29% of borrowings are on floating rates), KREIT estimates 0.14 Scents / c.2.4% impact on DPU. Although there’s minimal debt expiries in 2022, 2023 and 2024 debt expiries is 18% and 23% of debt respectively.
- 2022 utility costs are hedge with locked in contracts; estimate 1% to 2% pa impact post-2022 if current energy rates were to remain into 2023 or beyond. In Singapore, KREIT has locked in its utility rates with fixed rate contracts until end of 2022. There will be energy contracts expiring in end 2022, 2023 and 2024 (1 office asset each year) which could see 1% to 2% p.a. if energy rates were to remain at current high rates post 2022. In Australia, utility costs are largely pass-through.
- Capital Distributions could be used to backfill some earnings vacuum from the divestment of 275 George St. KREIT has more than S$500m of capital distributions which could be used to backfill some earnings vacuum from the divestment of 275 George St.
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 rising office market in Singapore. 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% FY22F yield and 0.9x P/NAV.