Analysts have maintained their “buy” calls on Keppel REIT with lower target prices following the trust’s 9MFY2022 results announcement ended Sept 30.
RHB Group Research analyst Vijay Natarajan, who has a target price of $1.15 from $1.31 previously, says Keppel REITs updates show continued positive momentum in the Singapore office portfolio with healthy occupancy improvement and strong rent growth.
“Outlook remains positive although slightly moderated lower, and should mitigate increasing interest costs’ impact. Service charges are also being raised across all Keppel REIT’s assets to counter higher utility charges,” says Natarajan.
UOB Kay Hian analyst Jonathan Koh — who has a target price of $1.24 from $1.33 previously — concurs, highlighting that Keppel REIT achieved positive rental reversions of 9.2% for 3QFY2022. Occupancy across One Raffles Quay, Ocean Financial Centre and Keppel Bay Tower have improved q-o-q, while average signing rents stood at $11.47 psf for 9MFY2022. Tenant retention was also healthy at 82%.
Although the average signing rent for Singapore office leases has inched up in 9MFY2022, Citi Research analyst Brandon Lee estimates 3QFY2022 signing rent edged lower by 0.7% to $11.74 psf per month.
This could be due to tenant or asset-specific reasons, or Keppel REIT’s slight cautiousness ahead of a slower leasing market in 4QFY2022 and impending macroeconomic slowdown, he adds. “Interest rate for refinancing its FY2023 expiring debts could expand by 150-200bps to 4%-4.5%,” he adds. Lee’s target price for Keppel REIT is $1.42.
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Koh also points out Keppel REIT’s pockets of weakness in Australia. Occupancy at 8 Chifley Square in Sydney remains low at 82% due to lease expiry by Quantinum, which has yet to be backfilled, while occupancy at Pinnacle Office Park in Sydney eased 4.2 percentage points to 88.8% due to downsizing by a tenant providing travel services.
Meanwhile, the development project Blue & William reached structural completion in September and is on track to be completed by mid-2023. CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong highlight that the REIT is in advanced negotiations with a few prospective tenants, although no details were shared.
Anniversary distribution a “bold” move
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Keppel REIT has surprised its shareholders with the declaration of $100 million from accumulated capital gains to be distributed over the next five years, leading up to its 20th anniversary in 2026. DBS Group Research analysts Rachel Tan and Derek Tan describe this as a bold and rare move, especially in such a challenging environment.
“We believe this is a strong testament from management that it is exercising duty of care and loyalty to all stakeholders who have been supportive of the company. $20 million per annum translates to about 0.5 cents per share.
“The 20-year anniversary reward is considered separately and is over and above any normal capital distribution that Keppel REIT typically reviews on a regular basis. Currently, Keppel REIT has more than $400 million in capital gains in the books,” they add.
DBS’s target price has been lowered to $1.15 from $1.40 previously to factor in higher risk-free rates, floating rates and refinancing rates. Despite higher financing costs, the analysts revised their FY2022-FY2023 DPU estimates upwards by 0.5% to 1.8% to factor in the 20-year anniversary reward.
“Despite the challenging environment and an uncertain macroeconomic outlook, we believe the management of Keppel REIT is making all the right moves to ensure the resilience of the portfolio, riding on the current Singapore office upcycle as it prepares to weather a ‘rainy’ day.
“With the heightened capital distribution, Keppel REIT is offering a 7% FY2023 yield and trading at 0.7x P/B, slightly below -1 standard deviation of its historical range and close to trough levels in the past five years – very attractive valuation levels, in our view,” they add.
RHB’s Natarajan has also lifted his FY2022-FY2024 DPU by 3%-4%, factoring in capital top-ups and higher financing charges.
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Similarly, UOB Kay Hian’s Koh raised his FY2023 DPU forecast by 2.3%, noting the positive impact of capital distribution of $20 million per year partially mitigated by higher cost of debts. “We expect average cost of debts to hit 3.3% in 2HFY2023.”
CGS-CIMB has also raised their FY2022-FY2024 DPU estimates by 2.51%-4.26% to include the anniversary distribution, partly offset by higher average funding cost assumption. However, our DDM-based target price is lowered to $1.14 on higher cost of equity assumption of 7.8%.
As at 12.38pm, shares in Keppel REIT are trading 4.5 cents higher or 5.06% up at 93.5 cents.
