3Q23 Results Analysis: Portfolio holding up better than expected
- 3Q23 estimated DPU -1.1% y-o-y (+2% q-o-q) to 1.45 Scts, in line with our estimates, due to higher expenses and interest costs
- Key positives: i) Higher signing rents, strong positive reversions, ii) improved occupancy to 97.8% (ex-Blue & William), iii) share buyback to continue at appropriate time, iv) some tenants looking to expand
- Key data to watch: i) prolonged high interest costs, ii) portfolio valuation given market transactions especially in Australia
- Maintain BUY; TP S$1.15; valuation remains attractive at close to 7% FY24F yield and 0.7x P/NAV for a medium term outlook and to position for a turn in interest rate cycle
What’s New?
Stable 3Q23 results; strong operational improvements with higher occupancy and strong positive rental reversions. KREIT delivered a relatively stable 9M23 with estimated DPU fell marginally by 1.9% y-o-y to 4.35 Scts, in line with our estimates. The decline was mainly due to higher property expenses and interest cost but partially mitigated by Anniversary Distribution of S$15m. Similarly, 3Q23 estimated DPU fell 1.1% y-o-y (+2% q-o-q) to 1.45 Scts. 3Q23 revenue and NPI grew 6% y-o-y and 2.3% y-o-y respectively but DI were mainly impacted by higher interest cost as expected. Gearing inched up marginally q-o-q to 39.5% (from 39.2% in 2Q23) while average cost of debt held relatively stable at 2.85% (2.84% in 2Q23). There are no major refinancing requirements in 2023. Management is in talks with lenders to refinance FY24 debt expiries and expects average cost of debt to trend up to mid-3% based on current interest rates. Overall operations remained healthy with portfolio occupancy continue to trend upwards to 97.9% (ex-Blue & Williams) vs 97% in 2Q23 while delivering strong positive rental reversions of 10.7% in 3Q23, mainly driven by Singapore (+10.6% in 3Q23). All markets saw improved occupancy with Australia recorded the largest improvement after 8 Chifley achieved 97.1% occupancy in 3Q23, up from 87.4% in 2Q23. We understand the government tenant which was reported to take up 100k sqft in 2Q23, took up more space at 8 Chifley. Other notable occupancy improvements: i) Blue & William’s committed occupancy increased to 42.5% from 37.7% in 2Q23; ii) KR Ginza II occupancy increased to 74.5% from 36.3% after securing a new renewable energy solutions tenant.
Our Views
Optimism on Singapore office will continue to hold up well into FY24; attractive valuation for medium term outlook especially to position for a turn in interest rate cycle. KREIT delivered another set of stable 3Q23 results despite cautious office outlook and concerns of rise in interest costs. Operationally, management remains optimistic that it could maintain its Singapore office signing rents at above S$12psf in FY24, thus expects to deliver low to mid-single digit positive reversions. Management does not expect major non-renewals for FY24 expiries, rather some tenants with expiring leases next year are looking to expand, contrary to market’s cautious outlook on office demand. Management believes portfolio valuation will be held up by strong underlying operational performance but mindful of Australia asset transactions as a reference to asset valuations. Management remains focus on asset and capital management while keeping an eye for potential asset recycling opportunities. Share buyback program continues at appropriate time especially post potential overhang on the distribution of Keppel Corporation’s dividend-in-specie. We maintain our BUY rating on Keppel REIT with TP of S$1.15. Keppel REIT is currently trading at close to 7% FY24F yield, close to +2SD of its historical range. Keppel REIT share price could be weighed down by cautious stance on the continuation of rising interest rates in the near term. However, we believe at these levels, it is an attractive entry point for a medium term outlook and to position for a turn in interest rate hike cycle.
| Summary of results (S$’m) | 3Q2023 | 2Q2023 | %q-o-q | 3Q2022 | % y-o-y | 9M2023 | 9M2022 | % y-o-y |
| Revenue | 57.7 | 57.2 | 0.9% | 54.6 | 5.7% | 172.6 | 164.4 | 5.0% |
| NPI | 44.1 | 44.9 | -1.8% | 43.1 | 2.3% | 134.0 | 132.6 | 1.1% |
| Income contribution from JV | 26.2 | 26.5 | -1.1% | 24.2 | 8.3% | 78.4 | 80.5 | -2.6% |
| DI | 54.6 | 53.8 | 1.5% | 54.9 | -0.5% | 163.6 | 165.4 | -1.1% |
| DPU (est for quarterly) | 1.45 | 1.43 | 2.0% | 1.47 | -1.1% | 4.35 | 4.44 | -1.9% |
| Gearing | 39.5% | 39.2% | 0.3 ppt | 38.4% | 1.1 ppt | 39.5% | 38.4% | 1.1 ppt |
| Average cost of debt | 2.85% | 2.84% | 0 ppt | 2.13% | 0.7 ppt | 2.85% | 2.13% | 0.7 ppt |
| ICR | 3.3 | 3.4 | (0.1) | 3.6 | (3.7) | 3.3 | 3.6 | (0.3) |
| Hedging Ratio | 76% | 76% | 0 ppt | 72% | 4 ppt | 76% | 72% | 4 ppt |
Source: Company, DBS
| Key Operational Data | 3Q2023 | 2Q2023 | %q-o-q | 3Q2022 | % y-o-y |
| Portfolio occupancies | 95.9% | 94.9% | 1 ppt | 96.8% | -0.9 ppt |
| – SG (based on simple average) | 99.3% | 99.1% | 0.2 ppt | 98.2% | 1.1 ppt |
| – AU (based on simple average) | 87.8% | 85.0% | 2.8 ppt | 92.9% | -5.1 ppt |
| – KR | 95.8% | 95.3% | 0.5 ppt | 98.6% | -2.8 ppt |
| – JP | 74.5% | 36.3% | 38.2 ppt | ||
| WALE (years) | 5.60 | 5.70 | -0.1 | 6.10 | -0.5 |
| – SG | 2.60 | 2.70 | -0.1 | 3.10 | -0.5 |
| – AU | 11.80 | 12.10 | -0.3 | 13.10 | -1.3 |
| – KR | 3.70 | 3.90 | -0.2 | 3.70 | 0.0 |
| – JP | 2.70 | 2.70 | 0.0 | ||
| Weighted av signing rents (S$psf pm) | |||||
| – SG | 12.43 | 12.35 | 0.6% | 11.47 | 8.4% |
| Lease expiries/Rent Reviews in FY2023 by Committed Attributable NLA | 2.5% | 4.2% | -1.7 ppt | 9.5% | -7 ppt |
| – Expiring leases | 2.5% | 4.0% | -1.5 ppt | 9.2% | -6.7 ppt |
| – Rent review leases | 0.0% | 0.2% | -0.2 ppt | 0.3% | -0.3 ppt |
| Lease expiries/Rent Reviews in FY2024 by Committed Attributable NLA | 13.3% | 13.5% | -0.2 ppt | 15.3% | -2 ppt |
| – Expiring leases | 13.3% | 13.5% | -0.2 ppt | 15.3% | -2 ppt |
| – Rent review leases | 0 ppt | 0 ppt | |||
| Rental Reversions (quarterly) | 10.7% | 7.7% | 3 ppt | 9.7% | 1 ppt |
Source: Company, DBS