Analysts are generally optimistic about Keppel REIT’s (KREIT) prospects after the REIT reported a “strong set” of operating metrics for the 3QFY2024 ended Sept 30 on Oct 22. CGS International (CGSI), Maybank Securities and RHB Bank Singapore have kept their “buy” calls while Citi Research remained “neutral”. All the analysts have also kept their target prices unchanged. CGSI has a target price of $1.15; Maybank’s target price remained at $1.05 while RHB kept its target price at $1.05. At the same time, Citi’s target price also stood at an unchanged 90 cents.
In its update, KREIT reported 3QFY2024 revenue of $68.6 million, 18.9% higher y-o-y while its quarterly net property income (NPI) rose by 17.2% y-o-y to $51.7 million. For the 9MFY2024, KREIT’s revenue rose by 12.3% y-o-y to $193.7 million while NPI grew by 10.8% y-o-y to $148.5 million.
The y-o-y increases for the REIT’s nine-month results stemmed from higher rental income and contributions from KREIT’s new assets, 2 Blue Street and 255 George Street.
Furthermore, KREIT saw portfolio occupancy improving by 0.6 percentage points (ppts) q-o-q to 97.6%, with a 21% q-o-q increase in leasing volumes signed during 3QFY2024.
KREIT’s distributable income of $160.6 million for the 9MFY2024 fell slightly short of the expectations of CGSI’s Lock Mun Yee and Natalie Ong. The figure stood at only 70% of the analysts’ FY2024 forecast.
However, they note KREIT’s improving operational metrics, citing its better portfolio occupancy rate and positive rental reversion, which averaged at a positive 10.2% in the nine-month period.
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They add: “KREIT has an estimated 5.2% of leases up for renewal/review in 4QFY2024, and a further 16.6% in FY2025, with management guiding that it still expects to achieve positive rental reversions for these leases, given the low average expiring rents of its Singapore leases of $10.34 and $11.14 psf for the rest of FY2024 and FY2025, respectively.”
Maybank’s Krishna Guha also liked KREIT’s metrics for the quarter with occupancy improvements in Australia and stable rates in Singapore. However, he highlights the REIT’s elevated gearing, which inched up by 0.6 percentage points q-o-q to 41.9% as at Sept 30.
“[KREIT’s] debt cost guide remains at mid-3% with potential to come in lower based on rate trajectory and bank margins,” he writes in his Oct 22 report.
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“Management also expected potential stabilisation/uplift of asset values with recent transactional cap rates in Australia coming in lower than 6.5% for 255 George St and rent growth in Singapore. This is likely to lower gearing,” he adds. “However, [the] focus remains on recycling for a resilient balance sheet.”
While he has kept his call and target price unchanged, Guha has lowered his distribution per unit (DPU) estimates by 2.5% and 1.4% for FY2024 and FY2025 respectively.
“While there are some large renewals due for next year (15% of net lettable area or NLA), expiring rents of $11.14 per sq ft are well below market, and lower rates may further spur economic activity. Valuation is supportive at a 6.2% yield and 0.7 times P/BV,” he says.
RHB’s Vijay Natarajan deems KREIT’s “healthy” set of numbers for the 3QFY2024 to be “in line” with his estimates. In his Oct 22 report, the analyst notes that the occupancy improvements were mainly driven by the Australia assets, namely 8 Exhibition Street in Melbourne and Pinnacle Office Park in Sydney. This demand is driven by financial services, legal and real estate sectors, Natarajan says.
While he has also noted the slightly higher financing costs by KREIT during the quarter, he adds that this is likely to peak by 1Q2025.
While the REIT reported “healthy” double-digit reversions in 3QFY2024, Natarajan expects its overall rent reversions to be positive and in the mid-to-high single digit range in 2025.
“Management is not concerned on the slight increase in Singapore central business district (CBD) vacancy rates due to the recently completed IOI Central Boulevard, as the asking rents are higher compared to its portfolio and it expects the majority of its tenants to stay,” he says.
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Looking ahead, the RHB analyst also expects valuations from KREIT’s assets to remain stable with some room for growth, especially from its overseas assets, which could lower its aggregate leverage.
To this end, he notes that KREIT’s management is “comfortable” with the REIT’s debt position. “While [the manager] remains open to good divestment opportunities (particularly for overseas assets), [it] is not in a rush to sell any of its assets.”
To Natarajan, KREIT’s valuations remain “undemanding” with the REIT trading at a P/B of 0.7 times. KREIT is still one of his top picks within the office sector.
Citi’s Brandon Lee is also positive about KREIT’s strong operational performance in its two major markets, but he has remained “neutral” on the REIT’s valuations and high gearing.
In his report dated Oct 22, Lee notes that the REIT’s higher debt expenses offset any positivity from its stronger operational performance in the 3QFY2024.
Excluding KREIT’s anniversary distribution, the analyst has estimated KREIT’s core distribution per unit (DPU) to be at 1.27 cents for the quarter, 4% lower y-o-y. This brings 9MFY2024 core DPU to 3.81 cents, which also fell by 4% y-o-y.
Lee explains that the y-o-y decline in the 3QFY2024 DPU was mainly due to higher debt expenses, which came from the new loan that was taken to partly fund 255 George Street and mitigated by the higher attributable NPI. The acquisition of 255 George Street itself as well as higher contributions from One Raffles Quay and Marina Bay Financial Centre offset the higher expenses.
To this end, Lee expects positive office reversions in Singapore to persist in the next three to 15 months, in view of expiring rents in 4QFY2024 to FY2025, while RHB’s Natarajan expects overall rent reversions to be positive and in mid-to-high single digits next year.
He is also expecting to see a slightly negative reaction from the market due to the miss in earnings expectations.
Units in KREIT closed 1 cent lower or 1.09% down at 91 cents on Oct 23.
