Analysts from RHB Bank Singapore, Maybank Securities and OCBC Investment Research (OIR) have all kept their “buy” calls on Keppel REIT after its 1HFY2024 ended June results, which saw a higher net property income (NPI) attributable to unitholders of $87.2 million.
However, RHB’s Vijay Natarajan is lowering his target price from $1.08 to $1.05, while Krishna Guha from Maybank’s target price is unchanged at $1, and OIR’s research team has increased its target price from 92 cents to 98 cents.
The REIT’s 1HFY2024 NPI growth was driven by higher occupancy from Ocean Financial Centre and KR Ginza II, as well as contributions from 2 Blue Street and 255 George Street, a Grade A office property that was acquired on May 9.
Natarajan from RHB says that “operationally, Keppel REIT’s performance continues to outperform”. The REIT has higher occupancies for the quarter, and high single-digit positive rent growth, which the analyst expects to be maintained in 2H2024.
He notes that the REIT is not overly concerned about the supply and competition in Singapore, as it expects the majority of its upcoming leases to be renewed.
Although there has been market talk on its tenant, BNP Paribas, cutting space from its current six floors at Ocean Financial Centre which accounts for about 3% of the REIT’s overall rental income, Natarajan believes this could be backfilled at higher rents – considering the prime location and rise in market rents since the initial lease signing.
After the completion of the REIT’s acquisition of the 255 George Street asset, which was fully funded by debt, Keppel REIT’s gearing has risen to 41.3% from 39.4% as of 1Q2024.
Natarajan says that the REIT’s management would look at possible divestments in the near-term, as they aim to keep gearing below 40%. Possible divestment options include T-Tower, which was earlier indicated to be in advanced stages, as well as few of the REIT’s mature Australian assets, the analyst says.
He notes that the REIT’s financing costs continue to remain a drag, with further increases anticipated in the next half of 2024 which will eventually weigh on its distribution per unit (DPU).
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
As such, he lowers his FY2024-FY2026 DPU estimates by 2%-3%, factoring in higher interest costs, including the REIT’s joint venture associate contributions.
Likewise, Guha from Maybank notes a resilient portfolio for the REIT but says to “watch on gearing”. The analyst similarly highlights that the REIT will focus on portfolio optimisation and a strong resilient balance sheet, while management will hold back on share buybacks.
Factoring in the acquisition of 255 George Street and higher occupancies in Japan and Pinnacle Office Park, Guha anticipates a DPU increase of about 1.5%. He leaves his rating and target price unchanged.
OIR’s equity research team similarly notes that Keppel REIT’s Singapore asset valuations are holding up well, but points out that the group’s aggregate leverage ratio increased 1.9 percentage points to over 40% this quarter.
They note the Monetary Authority of Singapore’s proposal to loosen leverage and interest coverage ratio requirements for the Singapore REITs (S-REITs) sector, which will result in improved financial flexibility in future.
As such, they lower their cost of equity assumption by 15 basis points to 6.9% and raise their terminal growth rate to 1.25%, which results in an increased target price from 92 cents previously to 98 cents.
Units in Keppel REIT closed 2.5 cents lower or 2.841% down at 85.5 cents on Aug 5.
