Keppel REIT (SGX:K71U)'s 3Q updates show continued positive momentum in the Singapore office portfolio with healthy occupancy improvement and strong rent growth.
Outlook remains positive although slightly moderated lower, and should mitigate increasing interest costs’ impact. Service charges are also being raised across all Keppel REIT’s assets to counter higher utility charges.
Keppel REIT's unitholders will receive additional capital distribution (S$20mil per year over the next 5 years) from past divestment gains, thereby boosting dividends.
Keppel REIT's 3Q22 and 9M22 Distributable Income Rose 1% and 3% Y-o-y
Keppel REIT's 3Q22 and 9M22 distributable income rose 1% and 3% y-o-y, driven by rent growth and acquisitions that were partially offset by lower associate contributions.
Keppel REIT announced that it will reward unitholders and leading up to its 20th anniversary in 2026, it has set aside S$100m from past capital gains or ~S$0.53 per share per year over the next five years, starting in 2H22 (~S$0.27 for 2H). This will be paid by drawing down debt from its revolving facilities. We are neutral on this move as we believe a targeted share buyback strategy or conserving cash could be a better option under current market conditions.
Service charges at Marina Bay Financial Centre and One Raffles Quay have been raised by 20% from 3Q22 in light of rising utility charges and there are plans to implement a similar hike across all its Singapore assets in 2023.
Strong Operational Improvement Across Its Singapore Assets
Keppel REIT's portfolio occupancy rose 1.3ppts q-o-q to 96.8%, driven by healthy occupancy improvement across all its Singapore assets but partially offset by slight occupancy decline in Australia and South Korea. Year-to-date rent reversion remains strong at 9.2% (3Q +9.7%), and excluding one large strategic lease, it would have been even higher at ~14% for the quarter.
Keppel REIT's management remains positive on rent growth outlook in Singapore as demand supply dynamics are still favourable. Physical occupancy (employees returning to the office) has reached a high 70% in Singapore and South Korea but remains low in Australia at 35-45%.
72% of Keppel REIT's debt is hedged, with every 50bps increase impacting its DPU by 2.1%. It has S$645m of loans (19%) due for expiry in 1H23 – management expects interest cost to increase by 150-200bps from the existing interest based on a 5-year fixed tenure.
Currently, 22% and 4% of Keppel REIT's borrowings are in AUD and KRW, providing a natural FX hedge; management also hedges a portion of its FX income 12-18 months forward.
Keppel REIT – Valuation & Recommendation
We lift FY22-24F DPU forecast for Keppel REIT by 3-4%, factoring in capital top-ups and higher financing charges. We also raise our COE assumptions by 80bps to factor in light of rising cost of capital from a sharp hike in interest rates.
Keppel REIT's ESG score of 3.2 out of 4.0 is two notches above the country median, as such, we apply a 4% premium to our intrinsic DDM value.
Keep BUY rating on Keppel REIT, with new S$1.15 target price from S$1.31, 30% upside and 7% yield.
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