Robust operational performance
- 9M23 distribution to unitholders of S$163.6m was broadly within expectations, at 73% of our FY23F forecast.
- 3Q23 portfolio occupancy improved qoq amid positive rental reversions of +8.6% for 9M23.
- Reiterate Add rating, with an unchanged DDM-based TP of S$1.14.
9M23 update highlights
In its 9M23 business update, Keppel REIT (KREIT) reported a 5% rise in 9M23 revenue to S$172.6m, but NPI grew by a smaller 1% yoy to S$134m due to higher property expenses including utilities cost and property taxes. However, distribution to unitholders was down 1.1% yoy to S$163.6m due to lower associate contributions and higher interest expense, partly offset by its anniversary distribution of S$15m.
Higher take-ups in Australia and Japan boost occupancy
Portfolio occupancy increased 100bp qoq in 3Q23 to 95.9% (97.9% excluding the newly completed Blue & William in Australia), with take-up at 8 Chifley Square and KR Ginza II rising 9.7% and 38.2% pts, respectively, to 97.1% and 74.5%, while occupancy at Blue & William increased 4.8% pts to 42.5%. KREIT renewed/leased c.1.1m sq ft of space in 9M23 (3Q: 249k sq ft), with demand coming from banking, insurance and financial services, as well as telco, media and telecom sectors and government agencies. It achieved robust portfolio rental reversion of +8.6% in 9M23, with Singapore performing stronger at +10.6% over the same period. KREIT has an estimated 2.5% of leases up for renewal/review in 4Q23F and a further 13.3% in FY24F. Management guided that it expects to achieve positive low- to mid-single-digit rental reversions for FY24F, given the low average expiring rents of its Singapore leases of S$11.05 psf in FY24F.
Average funding cost could trend up to mid-3% in FY24F
KREIT’s aggregate leverage stood at 39.5% as at 9M23, while adjusted interest coverage ratio stood at 2.9x. Management guided that all-in interest cost could rise to mid-3% in FY24F (from the average of 2.85% for 9M23). While management continues to focus on growing DPU and closing the wide gap between its share price and NAV, it said that it would also evaluate share buybacks, acquisitions and divestment opportunities, while committing to continue with its anniversary distribution (until FY27F).
Reiterate Add rating
We keep our FY23-25F DPU estimates unchanged and retain our Add rating and DDM based TP of S$1.14. At a c.7.1% FY23F dividend yield, we believe much of the downside risk has been factored into its current share price. Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions and recovery to preCovid demand for office space. Downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of office space, and reduced appetite for its office space due to a hybrid work environment.
