• Keep BUY, new SGD1.05 TP from SGD1.08, 19% upside and 6% Yield. 1H results came in slightly below. Operationally, Keppel REIT’s performance continues to outperform, with higher occupancies (2Q) and high single-digit positive rent growth, which are expected to be maintained in 2H, in our view. Financing costs continues to remain a drag, though, with further increases anticipated in 2H – weighing on DPU. Management guided for divestments in the near term to bring gearing below 40% levels. Valuations are relatively attractive to peers, trading at a >30% discount to book.

• Portfolio occupancy rose 0.6ppts QoQ to 97%, aided by occupancy upticks across all its markets. Rent reversion for the quarter moderated to 7.2% from 10.9% in 1Q, but is expected to be in the high-single digits for 2H. KREIT is not overly concerned on the supply and competition in Singapore, as it expects the majority of its upcoming leases to be renewed. While there has been market talk on BNP Paribas cutting space from its current six floors at Ocean Financial Centre (3% of KREIT’s overall rental income) due to right- sizing, we believe this could be backfilled at higher rents – considering the prime location and rise in market rents since the initial lease signing.

• Targeting divestments to reduce gearing to below 40% levels. Post the completion of 255 George Street acquisition in 2Q – which was fully funded by debt – gearing has risen to 41.3% from 39.4% as of 1Q. Management noted that its comfortable level remains slightly below 40% and would look at divestments in the near-term. Possible divestment options could include T- Tower, which was earlier indicated to be in advanced stages, as well as few of KREIT’s mature Australian assets – in our view.

• The Singapore portfolio’s value rose 0.6% HoH on higher income, while cap rates remained unchanged. Australian assets, on the other hand, saw slight declines from a 25-50bps cap rate expansion, resulting in a relatively flat (-0.2%) portfolio value on a same-store basis.

• 1H DPU down 3.4% YoY, mainly impacted by higher-than-expected financing costs, which rose 30% YoY, and elevated property taxes. Financing costs have risen 42bps since the start of the year to 3.31% pa, and is expected to stabilise around 3.5-3.7% levels for FY24-25.

• We lower our FY24F-26F DPU by 2-3%, factoring in higher interest costs, including for KREIT’s JV & associate contributions. The unchanged ESG score of 3.2 (out of 4.0) is a notch above country median score. Hence, a 2% ESG premium is applied to our new DDM-derived TP of SGD1.05.

Source: RHB Research - 31 Jul 2024