Weak 1Q21, Headwinds Ahead

• Keppel REIT (SGX:K71U)’s distributable income rose 22.0% y-o-y in 1Q21, with contribution from the Pinnacle Office Park in Sydney.
• Portfolio occupancy dipped q-o-q from 97.9% to 96.5% due to the weaker performance of its Australian assets. Rents in Singapore moderated further, even as recovery is expected in 2H21.
• We continue to see headwinds for leasing out vacancies and at pressured rents, given rising tenant downsizing risk, especially by financial institution tenants (32% of its NLA), amid increasing WFH entrenchment.
• Keppel REIT’s DPU growth is unexciting versus peers; maintain SELL at a S$0.95 DDM-based target price (COE: 7.0%, LTG: 1.0%).

Leasing Slow, Rental Reversions Eased Further

• Leasing activity was slow at ~310k sf, but up from ~250k sf in 4Q20, with new demand and expansion led by finance (~39%), manufacturing and distribution (33%) and legal (11%) tenants.
• Keppel REIT has backfilled ~89% of the space vacated by UBS at One Raffles Quay (up from ~60% at end-Dec 2020).
• Rental reversion moderated further to +10.7%, from +12.7% in 4Q20 and +15.0% in 3Q20. Average weighted signing rents of S$10.64 psfpm was at -3.4% q-o-q versus -0.1% q-o-q in 4Q20, with simple average rents at S$10.94 psfpm or -5.8% q-o-q versus -1.7% q-o-q.
• Keppel REIT's management sees a slow pick-up in demand in 2H21 against the recovering economic backdrop.

Lower Occupancies in Australia

• Occupancies dipped q-o-q at Pinnacle Office Park in Sydney (from 96.9% to 90.9%), 8 Exhibition stay weak in the near term.
• Its pivot towards rental stability with the 311 Spencer Street deal in Jul 2020, which serves as the headquarters for the Victoria Police for 30 years, should help cushion DPUs.

Balance Sheet Stronger, Limited Acquisition Catalysts

• Keppel REIT's gearing improved q-o-q from Keppel Bay Tower remains on track to be completed in 2Q21 and could lift DPUs by 2.9%.
• Keppel REIT's high trading yield versus tighter Singapore office yields means that acquisition-growth opportunities are likely to be in overseas markets (South Korea, Australia).

Source: Maybank Kim Eng Research - 22 Apr 2021