• Keep BUY, with new SGD1.15 TP from SGD1.31, 30% upside and 7% yield. 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. Unitholders will receive additional capital distribution (SGD20m pa over the next five years) from past divestment gains, thereby boosting dividends.

• 3Q/9M22 distributable income rose 1% and 3% YoY, driven by rent growth and acquisitions that were partially offset by lower associate contributions. KREIT announced that it will reward unitholders and leading up to its 20th anniversary in 2026, it has set aside SGD100m from past capital gains or ~53 SG cents/share pa over the next five years, starting in 2H22 (~27 SG cents 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. Portfolio occupancy rose 1.3ppts QoQ 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. YTD rent reversion remains strong at 9.2% (3Q +9.7%), and excluding one large strategic lease, it would have been even higher at c.14% for the quarter. 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 its debt is hedged, with every 50bps increase impacting DPU by 2.1%. It has SGD645m 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 its borrowings are in AUD and KRW, providing a natural FX hedge; management also hedges a portion of its FX income 12-18 months forward.

• We lift FY22-24F DPU 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. 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.

Source: RHB Research - 26 Oct 2022