• Keep BUY and SGD1.05 TP with 12% upside, 6% yield. Keppel REIT’s healthy set of 3Q24 numbers were in line. Portfolio occupancy (3Q) improved QoQ, aided by improvements in its Australian assets with a strong double-digit rent reversion – indicating office market conditions continue to remain healthy. Financing costs inched up during the quarter but are likely to peak by 1Q25. Valuations remain undemanding in our view, as the REIT trades at 0.7x PB and remains one of our office sector Top Pick.

• Portfolio occupancy improved 0.6ppt QoQ to 97.6%, with an increase in leasing volumes (+21% QoQ) signed during the quarter and higher proportion of new leases (c.43% of total), indicating healthy office demand across its portfolio. Occupancy improvements came mainly from its Australian assets – 8 Exhibition Street, Melbourne and Pinnacle office Park, Sydney while the Singapore portfolio remained relatively stable. Demand came mainly from financial services, legal, and real estate sectors. BNP Paribas, one of KREIT’s top 10 tenants, has slightly downsized its footprint in the Ocean Financial Centre and management noted that a third of this space has been backfilled by a legal tenant with positive rent reversions.

• Healthy double-digit rent reversions (+10.2% YTD), with a stronger double- digit rent reversion during 3Q24 vs 1H24’s 9.3%. The rent growth was supported by both Singapore and overseas assets. Management is not concerned on the slight increase in Singapore central business district (CBD) vacancy rates due to the recently completed IOI Central Boulevard, as the asking rents are higher compared to its portfolio and it expects the majority of its tenants to stay. Overall rent reversions are expected to be in the positive (mid- to high-single digits) for next year.

• Valuations expected to remain stable with some room for upside, potentially from overseas assets which could lower its aggregate leverage – 41.9% (from 41.3% in 2Q). Management is comfortable with KREIT’s debt position while it remains open to good divestment opportunities (particularly for overseas assets), but is not in a rush to sell any of its assets.

• 3Q24/9M24 distributable income from operations fell 2% YoY, mainly due to higher borrowing costs which increased 33% YoY YTD. NPI (9M24) rose 11% YoY with growth seen across all its markets driven by both organic and inorganic growth. All-in finance costs rose c.7bps QoQ to 3.38% and we expect this to peak at c.3.5% pa by 1Q25 with c.68% of borrowings fixed.

• No changes to estimates. ESG score is maintained at 3.2 (out of 4.0), resulting in a 2% ESG premium added for the TP. Key risks include sharp deceleration in GDP growth, and downsizing and right-sizing of office spaces by tenants.

Source: RHB Research - 23 Oct 2024