Keppel REIT has a portfolio of prime commercial assets in Asia Pacific’s key business districts with the objective of generating stable income and sustainable long-term total return for its unitholders. The REIT has a portfolio value of over $9 billion, comprising properties in Singapore, Australia (Sydney, Melbourne and Perth), South Korea, as well as Japan.
1. Describe Keppel REIT’s recent financial performance. What drove the y-o-y increase in net property income in 1Q2023?
Our active leasing efforts have resulted in higher rentals achieved on leases committed in 2022 and higher overall portfolio occupancy of 96.3% as at March 31 compared to 95.1% a year ago.
Driven by strong demand for premium grade-A offices in Singapore, One Raffles Quay has achieved 100% occupancy. Other Singapore properties also recorded high occupancies of more than 97%.
Keppel REIT’s 1Q2023 property income increased 5.9% y-o-y to $57.7 million and net property income attributable to unitholders grew 1.3% y-o-y to $40.5 million. Including the anniversary distribution of $5 million, distributable income for 1Q2023 was $55.2 million, 2.6% higher y-o-y.
2. What is Keppel REIT’s acquisition strategy?
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Keppel REIT strives to maintain a portfolio of quality assets across different markets to enhance the total return to unitholders. We continuously look for suitable opportunities and adopt a rigorous evaluation process to consider various factors.
Key considerations include location and quality of the asset, potential for rental growth and capital appreciation, distribution per unit (DPU) accretion, as well as demand and supply dynamics. Acquisitions should also complement and enhance our existing portfolio, while allowing Keppel REIT to maintain a robust balance sheet.
3. What are some key highlights and milestones achieved by Keppel REIT in recent months?
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In October 2022, we announced our strategic entry into Japan through the acquisition of KR Ginza II, a freehold asset in Tokyo’s prime Ginza district. The acquisition has enhanced the visibility of Keppel REIT in Japan and laid the foundation for our future expansion in the well-established and scalable investment-grade office market in Japan.
We also announced the practical completion of Blue & William in North Sydney on April 3. The property has secured an anchor tenant, Equifax, occupying approximately one-third of the building’s net lettable area. We are in the midst of negotiating with prospective anchor tenants for the remaining space. Blue & William will start contributing income to Keppel REIT from the practical completion date, with a three-year rental guarantee with the developer on the unlet space.
On the ESG front, we have established a Board ESG Committee to strengthen oversight on ESG-related matters.
In December 2022, T Tower in Seoul achieved the Leadership in Energy and Environmental Design (LEED) Building Operations and Maintenance: Existing Buildings Platinum Certification.
With that, all of our operational properties have obtained green certifications. In addition, Blue & William is designed to achieve the 5-Star Green Star Design and As Built Rating by the Green Building Council of Australia.
To align our financing plans with our commitment to sustainability, we have also increased our sustainability-focused funding to 62% of our total borrowings.
4. What strategies does Keppel REIT implement to ensure a healthy balance sheet?
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We adopt a prudent approach towards capital management and actively manage our debt maturities and interest costs. To manage borrowing costs, we diversified our funding sources and increased our borrowings on fixed rates from 63% as at Dec 31, 2021, to 75% as at March 31. We maintain a well-spread debt maturity profile and ensure that we do not have major refinancing requirement in any specific year.
We also monitor our aggregate leverage ratio, adjusted interest coverage ratio and weighted average term to maturity of our borrowings to ensure we maintain a robust balance sheet and sufficient financial flexibility.
On our foreign currency exposure, we adopt natural hedges where practicable by matching the currency of the borrowings to that of the assets. As at March 31, loans denominated in Australian dollar, South Korean won and Japanese yen formed approximately 16%, 4% and 3% of our total borrowings, respectively. To enhance returns to unitholders, we have bought back and cancelled a total of 106.6 million units since 2018 under our unit buyback programme.
5. How will Keppel REIT’s portfolio optimisation strategy benefit unitholders?
A key objective of our portfolio optimisation strategy is to enhance yield and total unitholder return. We constantly evaluate investment and divestment opportunities to realise capital gains and recycle capital to better-quality assets. Over the years, we have accumulated a significant sum of capital gains through the successful execution of our portfolio optimisation strategy and such gains have been distributed to unitholders to enhance their total returns.
6. What are the mid-to-long term growth plans for Keppel REIT?
We are focused on growing Keppel REIT to deliver sustainable longterm total return to our unitholders. Through our proactive portfolio optimisation effort, our portfolio value has grown from $600 million as at listing in 2006 to over $9 billion as at March 31.
While we keep a lookout for suitable investment and divestment opportunities, we will continue to exercise the same level of discipline to crystalise capital gains and grow Keppel REIT responsibly. 7. Does Keppel REIT have any plans to expand beyond the existing markets it operates in?
As at March 31, our portfolio of prime commercial properties remained well-anchored in the key business districts of Singapore (78.7% of portfolio), Australia (17.2%), South Korea (3.1%) and Japan (1.0%). We see potential and opportunities to expand within our existing markets and will continue to deepen our presence in them.
8. What are some ongoing market opportunities or trends and how is Keppel REIT leveraging them to strengthen its portfolio?
Since 2022, we observed that many tenants are focusing more on the quality of the office space and the amenities that the property and the surrounding can provide. The flight-to-quality trend has accelerated as companies place more emphasis on the office environment to meet their employees’ needs. Office space with high specifications, advanced technology, as well as modern and innovative fit outs are gaining popularity.
In addition, with a global move towards sustainability, green buildings are becoming one of the key considerations for office tenants. Buildings which are green-certified, operate on renewable energy or are carbon-neutral are increasingly appealing to many corporations. These trends bode well with Keppel REIT’s portfolio of prime office space in key business districts that offer a premium work environment with a focus on sustainability.
9. What is Keppel REIT doing to fulfil its sustainability commitments?
In early 2022, we announced a set of new ESG targets and had made good progress as set out below:
• Environment: We will continue to implement energy-efficient technologies and increase the use of renewable energy. We will also work with our tenants by exploring innovative ways to reduce energy consumption and greenhouse gas emissions.
• Social: In May 2023, we announced the appointment of a female independent director which increased our female board representation to c.29%. We encourage our employees to upgrade themselves through training for career advancement while contributing to Keppel REIT. We have been working closely with Keppel Capital in our community outreach programmes. For 2023, we will continue to support the community through various engagement activities.
• Governance: We remain committed to maintaining transparent and timely communication with our stakeholders while ensuring compliance with regulations.
10. Why should investors take a closer look at Keppel REIT?
Keppel REIT owns a resilient portfolio of prime commercial assets in Asia Pacific’s key business districts. Despite the challenging environment, Keppel REIT continued to achieve strong operating metrics and deliver DPU growth over the past five years. It is also trading at an attractive yield of 6.8% as at end-April based on FY2022 DPU of 5.92 cents.
Over the years, through successful portfolio optimisation, Keppel REIT has accumulated substantial capital gains and has committed to distribute $100 million of such gains to unitholders as appreciation of their support. This is also a testament to Keppel REIT’s commitment to deliver stable income and drive sustainable long-term total returns to unitholders.
Emelia Tan is a research analyst with the Singapore Exchange
