• Keppel REIT's 2H20/FY20 distribution of S$0.0293/S$0.0573 per unit were slightly above our FY20F projections.
• Expect positive rental reversion in FY21F, visible inorganic growth drivers.
• Reiterate ADD on Keppel REIT with a higher DDM-based target price of S$1.29.

Keppel REIT's 2H20 Results Highlights

• Keppel REIT (SGX:K71U) reported a 12.6%/5.5% y-o-y rise in gross revenue and distributable income to S$94.7m/S$99.8m, thanks to contributions from T Tower, Victoria Police Centre and lower borrowing costs, partly offset by divestment of Bugis Junction Tower, COVID-19 tenant relief measures and absence of capital gains distributions.
• For FY20, Keppel REIT achieved a distributable income of S$194.6m, +2.8% y-o-y, translating to a distribution of S$0.0573/unit, slightly above our projections.
• Keppel REIT revalued its portfolio down by 1.5% at end-FY20, resulting in a Book Value per unit of S$1.29.

High Portfolio Occupancy, Expect Positive Reversions in FY21F

• Portfolio committed occupancy stood at 97.9% at end-Dec 2020. Keppel REIT renewed/leased ~1.2m sqft of space in FY20 (~250k sqft in 4Q), of which 24% are new leases from the banking, insurance and financial services as well as real estate sectors.
• Keppel REIT achieved positive rental reversion of 14.8% in FY20 (+12.7% in 4Q). In terms of impact from COVID-19, management shared that it had total rental deferrals of S$1.9m and had provided a total of S$14.6m (including government property tax rebates and cash grants) of tenant relief measures in FY20.
• Looking ahead, Keppel REIT has 17.5% and 16.8% of leases to be renewed/reviewed in FY21F and FY22F respectively. With expiring rents averaging a low S$9.76psf in FY21F, management expects to continue to achieve positive reversions when these leases are re-contracted.

Visible Inorganic Growth Drivers

• In terms of portfolio management, FY20 was an active year for Keppel REIT with the completion of the Victoria Police Centre in Jul 2020 and completion of the purchase of Pinnacle Office Park in Sydney in Dec 2020. Contributions from the latter should be felt from FY21F.
• In addition, Keppel REIT recently announced the proposed acquisition of Keppel Bay Tower for S$657.2m or at a property yield of 4%. The transaction is pending unitholders approval. As such, we have not included the new income into our current forecast.
• Keppel REIT’s gearing stands at 37.7% at end-FY20F and it has a small 5% of its total debt due to be refinanced in FY21F. Management indicated that it continues to look for new growth opportunities within its existing markets.

Reiterate ADD Rating

• We tweak our Keppel REIT's FY21-22F distribution forecast up marginally post results.
• Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions and a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space.

Source: CGS-CIMB Research - 25 Jan 2021