• Keppel REIT (SGX:K71U)’s 2Q numbers were in line with our expectations. Portfolio metrics (occupancy and rents) continues to move in the right direction with positive guidance which, in our view, should offset inflation and interest cost pressures.
• Portfolio value rose 2% in 1H, with cap rates expected to hold steadily this year despite rising rates.
• The valuation is attractive with Keppel REIT's share price trading at a 16% discount to book value.

Keppel REIT's DPU in 1H Up 1% Y-o-y; Increase in Fixed Hedges

• Keppel REIT's DPU growth was driven by higher contributions from existing assets and acquisitions partially offset by divestments and adverse forex movements. Associate contribution was -4.6% y-o-y due to higher interest expense and lower one-off income, while JV contributions declined from lower occupancies at 8 Chifley Square.
• In 2Q, Keppel REIT managed to increase its debt hedges to 73% (from 63%) while the total interest costs went up by 12bps q-o-q; 50% of its current borrowings are sustainability focussed. Overall NAV rose 3.1% h-o-h to S$1.33.

Occupancy Increased 0.4ppt Q-o-q

• Occupancy increased 0.4ppt q-o-q while rent reversion in 1H was 8.7% amid the continued strength in office market. Keppel REIT has backfilled ~90% of space given back by DBS and nearly 33% of Standard Chartered space (with another 33% in negotiations) which will be returned back later this year. It continues to see strong demand from technology and financial services tenants despite challenging market conditions.
• Rent reversion for Singapore assets stood at +11% (overall 8.7%) with a positive outlook for the rest of the year.
• Overall portfolio occupancy increase came mainly from 8 Chifley Square (+13.4ppt) and Pinnacle Office Park while three of its four Singapore office assets saw occupancy decline yet management considers this trend is transitory.

Raising Management Charges to Mitigate Cost Pressures

• Keppel REIT has increased service charges for Marina Bay Financial Centre and One Raffles Quay by 25 cents to tackle the rising inflationary pressures with other assets likely to follow suit. Its Singapore assets utility rates are hedged this year, with one asset expiring at the end of 2022 and others in 2023 -2024.

Keppel REIT's Gearing Declined to 37.9%

• Keppel REIT's gearing declined to 37.9% (from 38.7%) on the back of a higher portfolio value. Blue & William in Sydney is on track to be completed by 1H23. Keppel REIT currently receives a 4.5% pa coupon on progressive payments and has a 3-year rent guarantee on unlet space post completion.

No Changes on Earnings Forecast

• Based on our proprietary in-house methodology, we derive an ESG score of 3.2 for Keppel REIT out of 4.0. We applied a 4% premium to our intrinsic DDM value for Keppel REIT.

• Maintain BUY rating on Keppel REIT with an unchanged target price of S$1.31, 21% upside and ~6% yield.

Source: RHB Invest Research - 27 Jul 2022