• Keep BUY, TP drops to SGD1.10 from SGD1.14, 13% upside. Keppel REIT’s results were slightly below estimates, with earnings meeting 96% of our full-year forecast. Despite the ongoing technology sector and economic slowdown, Singapore’s office market is expected to stay resilient on low supply and flight-to-quality trends. We believe the REIT could also look at asset divestments to lower gearing and recycle capital. Valuations are reasonably attractive, at 0.7x book value with a FY23F yield of 6.2%.

• 2H22/FY22 DPU rose 2.4%/1.4% YoY, aided by the first tranche of the anniversary dividend distribution of SGD10m. Operational DPU (2H) was lower by 4% YoY on higher interest expenses, lower JV & associates income, and a weaker AUD. KREIT remains committed to a SGD20m annual capital top-up for the next four years, which will offset interest cost hikes. Portfolio value rose 1.7% HoH, with Singapore assets (+2.3% HoH) more than offsetting the weakness from assets abroad. About 76% of debt is hedged, with every 50bps rise in interest rates affecting DPU by 2%.

• Blue & William’s first anchor tenant, Equifax, will consolidate its office space to occupy one-third of the building (c.4,350sqm). Management noted signing rental rates were in line with development assumptions of c.900- 1,100psm pa. The building is on track to be completed by mid-2023. The developer, Lendlease, has been providing 4.5% annual coupon payments during the current development phase, and has also committed to a 3-year rental guarantee on any unlet space after practical completion.

• Slightly disappointing Japan entry. In Oct 2022, KREIT announced its entry into the Japan market by acquiring Ginza 2-chome, a freehold office building in central Tokyo, for JPY8.8bn (SGD84m). While we welcome its move to diversify into Japan, we believe management overpaid for the asset. The building is only c.36% occupied currently, and has an estimated NPI yield of 1.2% (3.1% when fully occupied), which we regard as very low. Debt cost is expected to be around c.1.5%, which means the acquisition is not expected to be immediately yield-accretive. When the building is fully occupied, however, the deal will be mildly accretive with full debt funding.

• Mid- to high-single digit reversions expected in FY23F. KREIT posted strong portfolio rental reversions of +19.4% in 4Q22 (FY22: +10%) which we believe was mainly driven by mark-to-market of rent for space surrendered by Standard Chartered (c.80% of 184k sqf backfilled). Despite the economic and technology sector slowdown, it expects office leasing demand to remain firm in 1H, then cool down in 2H. The overall portfolio occupancy rate is expected to remain resilient, at c.96% for 2024.

• We lower FY23-24F DPU by 4-5% on higher interest costs, and after tweaking occupancy, rental and recent acquisition assumptions. As KREIT’s ESG score of 3.2 is two notches above the country median, we applied a 4% premium to our intrinsic DDM value to derive our TP.

Source: RHB Research - 30 Jan 2023