Stronger Leasing, Slower DPU Growth

• Keppel REIT (SGX:K71U)’s distributable income jumped 20.8% y-o-y in 9M21, and 44.0% y-o-y in 3Q21, with contributions from Victoria Police Centre (in Melbourne), Pinnacle Office Park (Sydney) and Keppel Bay Tower (Singapore). The performance was in line with our estimates and the street.
• Keppel REIT's portfolio occupancy rose to 97.1% (from 96.7% in 2Q21), helped by an improvement at OFC, ORQ, Keppel Tower and its Australian properties. Office demand tailwinds have strengthened Keppel REIT’s fundamentals, but DPU growth remains unexciting versus peers.
• Maintain HOLD on Keppel REIT with S$1.00 DDM-based target price (COE: 7.0%, LTG: 1.0%).
• We prefer CapitaLand Integrated Commercial Trust (SGX:C38U), with catalysts from DPU recovery in 2021, and redevelopment upside. Recent report: CapitaLand Integrated Commercial Trust - Maybank Kim Eng 2021-10-24: In Recovery Mode; Visible Growth Drivers Into FY22e.

Rental Reversions Eased, to Stay Positive in FY22

• Leasing activity rose to ~995k sf in 3Q21 (from ~412k sf in 2Q21/ ~310k sf in 1Q21) with new demand and expansion led by finance (35%), TMT (22%), and manufacturing/ distribution (18%) sector tenancies. Keppel REIT's rental reversion eased to +1.0% (from +4.1% in 2Q21, +10.7% in 1Q21, and +12.7% in 4Q20), with average weighted signing rents (of S$10.30psfpm) lower than 2Q21 (at S$10.93 psfpm).
• Grade A office rents have bottomed out and we expect rental reversion to remain positive in 2022, against our estimate of +5% y-o-y recovery, versus its S$10.38 psfpm expiring rents.

Australia Occupancies Resilient

• Occupancies were stable at Pinnacle underway, and should improve in 4Q21.
• With lockdowns eased, we see stronger demand recovery and rental growth prospects for prime grade occupancies across Australia’s office submarkets in FY22.

Gearing Improves, Low Deal Visibility

• Keppel REIT's gearing opportunities in Sydney and Melbourne, as valuations for assets have eased on the back of higher leasing risks.

Source: Maybank Kim Eng Research - 26 Oct 2021