UOBKH: Keppel REIT – Buy Target Price $1.41

alanyeo

2 years ago

1H22: Prime Beneficiary As Vacancy Within Core CBD Tightens

KREIT is the prime beneficiary of office upcycle within core CBD. It achieved positive rental reversion of 7.5% in 2Q22 with rents rising more rapidly in May and June. Portfolio committed occupancy improved 0.4ppt qoq to 95.5%. It is in advanced negotiation with a few prospective tenants. If successfully signed, portfolio occupancy would improve 1.5ppt to 97%. KREIT provides 2022 distribution yield of 5.4% (CICT: 5.4% and Suntec: 6.5%). Maintain BUY with target price of S$1.41.

RESULTS

• Keppel REIT (KREIT) reported DPU of 2.97 S cents (+1.0% yoy) for 1H22, which is in line with our expectations.

• Prime beneficiary of office upcycle. NPI attributable to unitholders increased 6.6% yoy in 1H22 due to the acquisition of Keppel Bay Tower in Singapore (completed on 18 May 21), partially offset by the divestment of 275 George Street in Brisbane (completed on 30 Jul 21). Contributions from associates and JVs decreased 9.3% yoy due to higher cost of borrowings for One Raffles Quay (ORQ) and Marina Bay Financial Centre (MBFC) in Singapore and lease expiry for Quantium at 8 Chifley Square in Sydney.

• Strong positive rental reversion. Leases committed amounted to 466,900sf (attributable) in 1H22. On a portfolio-wide basis, KREIT achieved positive rental eversion of 7.5% in 2Q22. Vacancy has tightened within core CBD and rents surged more rapidly in May and June. Average signing rents for Singapore office leases were S$11.43psf in 1H22 (1Q22: S$11.15psf). New leasing demand and expansion were mainly from technology, media & telecommunications (20.3%), banking, insurance & financial services (20.3%) and real estate & property services (17.2%). Retention rate was healthy at 89%.

• Mid-year portfolio valuation. Valuation for the Singapore portfolio increased S$96.7m or 1.4% to S$7.0b due to higher rental growth. Valuation for the Australian portfolio increased S$70.8m or 4.4% to S$1.7b driven by Blue & William (construction progress) and Victoria Police Centre (long WALE of 28 years). KREIT recognised revaluation gain of S$108.7m NAV per unit increased 3.1% hoh to S$1.33 in 1H22.

• Portfolio committed occupancy improved 0.4ppt qoq to 95.5% in 2Q22. Occupancy for MBFC improved 1.5ppt qoq to 97.4%. KREIT has backfilled 90% of 75,000sf space vacated by DBS at MBFC Tower 3. For the 200,000sf space vacated by Standard Chartered Bank at MBFC Tower 1, one-third is already backfilled while another one-third is under advanced negotiation. The signing rents were S$9-13psf/month for Tower 3 and S$10-15psf/month for Tower 1. Separately, KREIT is in advanced negotiation with a few prospective tenants. If successfully signed, these new leases would improve portfolio occupancy by 1.5ppt to 97%.

• Recovery in Australia. In Australia, viewing has resumed after the reopening. Leasing activities have picked up since April. Occupancy at 8 Chifley Square jumped 13.4ppt qoq to 82.0%, while occupancy at Pinnacle Office Park improved 2.4ppt qoq to 93.0%. Weighted average lease expiry (WALE) is long at 6.0 years (top 10 tenants: 10.5 years).

• Resilient balance sheet. Aggregate leverage improved 0.8ppt qoq to 37.9% in 2Q22 due to the revaluation gains. KREIT has secured a green loan of A$100m maturing in 2026. It has achieved its target of having sustainability-focused funding accounting for 50% of total borrowings by 2025. It does not have any borrowings maturing in 2H22.

• Sensitivity to higher interest rates. All-in cost of debts rose 12bp qoq to 1.93% in 2Q22. KREIT has increased the proportion of borrowings hedged to fixed interest rates from 71% to 73%. Every 50bp increase in base rates (swap offer rate/Singapore overnight rate average /bank bill swap rate) will reduce DPU by 0.12 S cents or 2.1% per year.

STOCK IMPACT

• Positive leasing momentum. Management guided positive rental reversion at mid-to-high single digit for 2022 as average expiring rents for Singapore office is low at S$9.82psf/month for 2H22. Leases expiring in 2H22 accounted for 4.9% of portfolio NLA.

• Recovery has strengthened and broadened. According to CBRE, office rents for Grade A core CBD increased 7.6% yoy and 3.2% qoq to S$11.30psf/month in 2Q22. Strength in the office market was driven by the reopening with all employees allowed back to their workplaces since 26 Apr 22. AXA Tower commenced demolition. Vacancy for Grade A office space within core CBD tightened 0.1ppt qoq to 4.4%. Thus, office landlords have raised their rental expectations. Leasing activities are dominated by renewals. There were also new setups from the legal sector and non-bank financial institutions.

• Minimal impact from rising electricity tariff. KREIT has raised service charges at MBFC and ORQ to offset impact from higher electricity tariff. Its leases for Australia and South Korea are triple net with cost of electricity borne by tenants.

• Development of office property at North Sydney. Development of Blue & William, a freehold Grade A office building with NLA of 152,126sf located in close proximity to North Sydney Train Station, is 48.7% completed as of Jun 22. The developer Lendlease provides a coupon of 4.5% on cumulative progress payment during the development period. Lendlease has provided a three-year rental guarantee on unlet space after practical completion scheduled in mid-23, which ensures the property is able to provide NPI yield of 4.5%. The development has garnered interest from a few prospective tenants.

EARNINGS REVISION

• We maintain our existing DPU forecast.

VALUATION/RECOMMENDATION

• Maintain BUY. Our target price of S$1.41 is based on DDM (cost of equity: 6.5%, terminal growth: 2.3%).

SHARE PRICE CATALYST

• Keppel Bay Tower will provide full-year contribution in 2022. Practical completion of Blue & William in mid-23.

Keppel_REIT Click here to Download Full Report in PDF