Analysts are staying optimistic on Keppel REIT (KREIT) amid the economy reopening up from the pandemic, as the REIT is seeing a strong demand for its office spaces and rent rates are increasing in the market.
This was recovery was evident in the REIT’s latest 1HFY2022 ended June results, which saw distribution per unit (DPU) grow 1.0% higher y-o-y to 2.97 cents, as net property income (NPI) increased by 6.0% to $89.5 million. The higher NPI was mainly attributable to the contribution from Keppel Bay Tower, which was acquired on May 18, 2021, as well as the higher NPI from the REIT’s Ocean Financial Centre (OFC), 8 Exhibition Street and Pinnacle Office Park.
See: Keppel REIT reports 1% higher DPU of 2.97 cents for 1HFY2022
With the REIT’s outlook looking rosy ahead, CGS-CIMB Research, RHB Group Research, Maybank Securities and Citi Research are all maintaining their “buy” recommendations on the counter with target prices of $1.29, $1.31, $1.25 and $1.42, respectively.
Higher occupancy
Portfolio committed occupancy rose q-o-q to 95.5% in 2QFY2022 compared to 95.1% in the previous quarter, as strong backfilling at Marina Bay Financial Centre (MBFC), 8 Chifley Square and Pinnacle Office Park offset the transitory vacancies at OFC, One Raffles Quay (ORQ) and Keppel Bay Tower.
KREIT renewed/leased 881.9k sq ft of space in 1H FY2022 at an average rental uplift of about 8.7%, with about 76% of the leasing activities being renewals. New leasing demand came from technology, media and telecoms, banking and financial services and real estate and services sectors.
As at end-1HFY2022, KREIT had 4.9% of leases to be renewed/reviewed in 2HFY2022 and a further 13.2% in FY2023. Expiring rents for 2HFY2022 averaged $9.82psf, and $10.81psf in FY2023.
To manage rising operating costs, the REIT was able to pass on the higher costs in the form of increased service charges for some of its Singapore leases. Meanwhile, in Australia, leasing of vacated space at 8 Chifley Square in Sydney progressed with occupancy recovering to 82%. The development project, Blue & William, is about 48.7% constructed and is on track to be completed by mid-2023.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Overall portfolio occupancy increase came mainly from 8 Chifley Square (+13.4 percentage points) and Pinnacle Office Park, while three of its four Singapore office assets saw occupancy decline yet management considers this trend is transitory.
“Together with leases under various stages of documentation/negotiation and a robust demand outlook, we believe portfolio committed occupancy is likely to trend up in coming quarters,” says CGS-CIMB analyst Lock Mun Yee.
RHB’s Vijay Natarajan notes that the REIT has backfilled about 90% of the space given back by DBS and about 33% of Standard Chartered space (with another 33% in negotiations), which will be returned back later this year. “Portfolio metrics (occupancy and rents) continues to move in the right direction with positive guidance which, in our view, should offset inflation and interest cost pressures,” says Natarajan.
Maybank’s Chua Su Tye too has a similar view. Chua says: “Based on leases under documentation, management expects occupancy to climb to about 97% in the coming quarter(s). We think margins are well-cushioned, as KREIT has raised service charges at MBFC and ORQ to offset higher utility costs, while these are passed through in Australia and South Korea.”
Citi’s Brandon Lee notes that the REIT has not seen any cap rate expansion for prime CBD office assets for both Singapore and Australia, which appears to have been validated by its 1HFY2022 valuation exercise. He is upbeat on the REIT filling up Standard Chartered’s soon-to-be vacated space in 4Q2022, as well as the increased service charges at MBFC and ORQ, which he believes should be sufficient to offset higher utilities expenses, while service charges for other Singapore properties will likely be adjusted upwards upon expiry of existing utilities hedges.
Lower gearing
KREIT’s aggregate leverage stands at 37.9% as at end-1HFY2022 following its revaluation exercise, compared to 38.7% previously, on the back of higher portfolio value.
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Average all-in interest cost rose q-o-q to 1.93%. An estimated 73% of its debt are on fixed rates and management indicated that a 50 basis points (bps) hike in funding cost could erode its DPU by 0.12 cents (or about 2.1% of FY2021 DPU).
In terms of forex exposure, KREIT indicated that it has hedged 50-80% of its Australian dollar exposure over a 12-18 month period.
“Portfolio value rose 2% in 1HFY2022, with cap rates expected to hold steadily this year despite rising rates. The valuation is attractive with the stock trading at a 16% discount to book value,” says Natarajan.
“While we expect KREIT will continue to eye assets under management (AUM) growth in core markets, deal visibility is low amid interest rate volatility,” says Chua.
On the other hand, Lee observes that debt cost inched up 12 bps q-o-q to 1.93%, which likely stemmed from higher hedged ratio (+2 percentage points to 73%) and interest rate swaps.
“With KREIT likely to expand its hedged ratio and swap rates at 100-200 bps above floating rates, all-in interest cost should exceed 2% ahead. On the bright side, KREIT does not have any loans expiring in 2HFY2022. For every 50 bps rise in interest rates, FY2022 DPU falls by about 2%,” says Lee.
As at 3.10pm, units in KREIT are trading at $1.11.
