Slower Leasing Momentum

• Keppel REIT (SGX:K71U)’s 1H21 DPU rose 5.0% y-o-y and 0.3% h-o-h, with contribution from 311 Spencer (Melbourne), Pinnacle Office Park (Sydney) and Keppel Bay Tower (Singapore). Portfolio occupancy was stable at 96.7% (from 96.5% in 1Q21), helped by improvement at ORQ (from 94.0% to 96.8%).
• We continue to see headwinds for leasing out vacancies and at pressured rents, given tenant downsizing risk, especially by financial institution tenants (32% of its NLA), amid increasing WFH entrenchment.
• With DPU growth unexciting versus peers, we stay at SELL, at a S$0.95 DDM-based target price (COE: 7.0%, LTG: 1.0%) for Keppel REIT.

Further Easing in Rental Reversions

• Leasing activity was at ~412k sf in 2Q21 (from ~310k sf in 1Q21) with new demand and expansion led by finance (c.33%), manufacturing/ distribution (30%) and TMT (c.20%) tenants. It has backfilled 96% of the space vacated by UBS at ORQ (from ~86% at end-Mar 2021).
• Rental reversion eased again to +4.1% in 2Q21 (from +10.7% in 1Q21, +12.7% in 4Q20). Average weighted signing rents (of S$10.83 psfpm) was +1.8% q-o-q with simple average rents (of S$10.95 psfpm) at +0.1% q-o-q, from -5.8% q-o-q in 1Q21.
• Keppel REIT's management cautioned that leasing momentum has slowed in 3Q21 amid movement restrictions, even as rental reversions should remain positive, and cushioned by low S$10.03 psfpm expiring rents in 2021.

Divestment, Stable Occupancy in Australia

• Occupancies were stable at Pinnacle Office Park (from 90.9% to 90.0%), 8 Exhibition (96.0%), and 275 George (90.6%), while 311 Spencer, 8 Chifley Square and the David Malcolm Justice Centre remain ~2%, assuming the proceeds are utilised to reduce borrowings.

Balance Sheet Sound, Low Deal Visibility

• Keppel REIT's gearing rose q-o-q to 38.9% (from 35.2%) as AUM increased ~9% h-o-h with Keppel Bay Tower in May21. Cap rates in Singapore were stable, while valuation of MBFC T3 dipped 0.9% due to potential occupancy changes and lower rental assumptions.

• While management continues to eye overseas deals, a sharp 45bps cap rate compression at T Tower (from 4.25% to 3.80%) has likely limited acquisition growth opportunities in South Korea.

Source: Maybank Kim Eng Research - 28 Jul 2021