Headwinds Ahead, Stay at SELL

• Keppel REIT (SGX:K71U)’s 2H FY20 DPU, up 4.6% y-o-y was ahead of our estimates and in-line with the street. This was due to stronger-than-expected Singapore occupancy and lower borrowing costs.
• Rents have moderated and its outlook remains challenging given uncertainties in office demand amid the macro downturn and work-from-home entrenchment. We continue to see headwinds for leasing out vacancies and at pressured rents. This is especially in the coming quarters as firms reassess options post-COVID.
• We anticipate further downsizing by financial institution tenants (~33% of its NLA).
• Keppel REIT’s DPU growth is unexciting versus peers, and we maintain SELL, at a S$0.90 DDM-based target price (COE: 7.0%, LTG: 1.0%).

Uptick in Leasing

• Leasing activity picked up in 4Q20, with new demand and expansion from finance (~37%), real estate (34%) and technology (14%) tenants. Keppel REIT has backfilled ~60% of the space vacated by UBS at One Raffles Quay, and management aims to raise this to 90% in 1Q21.
• Rental reversion moderated further to +12.7% in 4Q20 and +14.8% for FY20 (from +15.0% in 3Q20 and +15.4% in 9M20). Average weighted signing rents of S$11.02 psfpm (-0.1% q-o-q) remains above Grade A core CBD market average of S$10.40 psfpm, while simple average rents were S$11.61 psfpm (-1.7% q-o-q).
• Management expects single-digit positive rental reversion for the year.

Pivoted Towards Longer WALE in Australia

• Keppel REIT has pivoted towards rental stability with its recent Australian acquisitions offering a longer WALE. 311 Spencer Street, completed in Jul 2020, is fully leased to the State of Victoria for 30 years to serve as the headquarters for the Victoria Police.
• Its recent expansion into Sydney’s Silicon Valley, with the acquisition of Pinnacle Office Park for AUD306.0m (S$303.3m) at an initial 5.25% NPI yield and a 4.8-year WALE, however sees it competing for similar suburban offices with Ascendas REIT (SGX:A17U).

Done Deal in Singapore, Limited Acquisition Catalysts

• Keppel REIT's Singapore portfolio valuation fell 1.5% y-o-y due to weaker occupancies and rents; despite this cap rates tightened at Marina Bay Financial Centre Towers 1 & 2 and One Raffles Quay (from 3.63% to 3.45%).
• Keppel REIT's gearing rose to 37.3% after the acquisition of Pinnacle Office Park and the S$300m (3.15%) perpetual securities issuance. Its S$657.2m acquisition of Keppel Bay Tower at 4.0% NPI yield is expected to be completed in 2Q21, and could lift DPUs by 2.9%.
• Keppel REIT's high trading yield versus tighter Singapore office yields suggests further acquisition-growth opportunities are likely to be overseas (South Korea and Australia).

Source: Maybank Kim Eng Research - 26 Jan 2021