Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


Keppel REIT - Operating Metrics Remain Strong

Author:   |    Publish date:

  • Keppel REIT (SGX:K71U)'s 3Q 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.
  • Keppel REIT's unitholders will receive additional capital distribution (S$20mil per year over the next 5 years) from past divestment gains, thereby boosting dividends.

Keppel REIT's 3Q22 and 9M22 Distributable Income Rose 1% and 3% Y-o-y

  • Keppel REIT's 3Q22 and 9M22 distributable income rose 1% and 3% y-o-y, driven by rent growth and acquisitions that were partially offset by lower associate contributions.
  • Keppel REIT announced that it will reward unitholders and leading up to its 20th anniversary in 2026, it has set aside S$100m from past capital gains or ~S$0.53 per share per year over the next five years, starting in 2H22 (~S$0.27 for 2H). This will be paid by drawing down debt from its revolving facilities. We are neutral on this move as we believe a targeted share buyback strategy or conserving cash could be a better option under current market conditions.
  • Service charges at Marina Bay Financial Centre and One Raffles Quay have been raised by 20% from 3Q22 in light of rising utility charges and there are plans to implement a similar hike across all its Singapore assets in 2023.

Strong Operational Improvement Across Its Singapore Assets

  • Keppel REIT's portfolio occupancy rose 1.3ppts q-o-q to 96.8%, driven by healthy occupancy improvement across all its Singapore assets but partially offset by slight occupancy decline in Australia and South Korea. Year-to-date rent reversion remains strong at 9.2% (3Q +9.7%), and excluding one large strategic lease, it would have been even higher at ~14% for the quarter.
  • Keppel REIT's management remains positive on rent growth outlook in Singapore as demand supply dynamics are still favourable. Physical occupancy (employees returning to the office) has reached a high 70% in Singapore and South Korea but remains low in Australia at 35-45%.
  • 72% of Keppel REIT's debt is hedged, with every 50bps increase impacting its DPU by 2.1%. It has S$645m of loans (19%) due for expiry in 1H23 – management expects interest cost to increase by 150-200bps from the existing interest based on a 5-year fixed tenure.
  • Currently, 22% and 4% of Keppel REIT's borrowings are in AUD and KRW, providing a natural FX hedge; management also hedges a portion of its FX income 12-18 months forward.

Keppel REIT – Valuation & Recommendation

  • We lift FY22-24F DPU forecast for Keppel REIT by 3-4%, factoring in capital top-ups and higher financing charges. We also raise our COE assumptions by 80bps to factor in light of rising cost of capital from a sharp hike in interest rates.
  • Keppel REIT's ESG score of 3.2 out of 4.0 is two notches above the country median, as such, we apply a 4% premium to our intrinsic DDM value.
  • Keep BUY rating on Keppel REIT, with new S$1.15 target price from S$1.31, 30% upside and 7% yield.

Source: RHB Invest Research - 26 Oct 2022

Share this
Labels: Keppel Reit

Related Stocks

Chart Stock Name Last Change Volume 
Keppel Reit 0.85 0.00 (0.00%) 1,463,100 

  Be the first to like this.

I3 Messenger
Individual or Group chat with anyone on I3investor

240  175  208  768 

Top 10 Active Counters
 Seatrium 0.132+0.001 
 HSI 19000MBeC.. 0.073+0.022 
 NikkoAM-STC A.. 0.812+0.012 
 HSI 16600MBeP.. 0.06-0.023 
 CapAllianz 0.003+0.001 
 HSI 15600MBeP.. 0.079-0.018 
 Rex Intl 0.198+0.002 
 RH PetroGas 0.235+0.03 
 HSI 16400MBeP.. 0.024-0.016 
 YZJ Shipbldg SGD 1.66-0.01