Analysts are positive on Keppel REIT K71U despite reporting a dip of 6.7% in distributable income from its operations of $50.2 million on April 20. The REIT also recorded a positive rental reversion rate of 9.3% for its 1QFY2023 ended March.
In their respective reports, analysts from Citi Research, RHB Bank Singapore and DBS Group Research have maintained their “buy” calls for Keppel REIT, with target prices of $1.10, $1.10 and $1.15.
Meanwhile, OCBC Investment Research has maintained its “hold” rating with a slightly increased fair value estimate of 87 cents from 85 cents previously.
According to Brandon Lee of Citi, Keppel REIT's 1QFY2023 operational update paints a better-than-market performance within Singapore's office sector, evidenced by 0.4 percentage point improved occupancy to 98.2%, a positive reversion of 9.3% on a portfolio basis and a 4 percentage point q-o-q increase in signing rents, mitigated by a weak leasing market.
“Keppel REIT's cautious stance on portfolio reconstitution suggests to us that vendors' asking prices remain firm, especially for prime/quality assets which it is seeking in key gateway cities like Sydney, while asset divestments may bring about a temporary (but hard-to-fill) income gap, in our view,” he explains.
RHB’s Vijay Natarajan says that the REIT’s 1QFY2023 numbers met expectations, with portfolio occupancy remaining high and stable with healthy positive rent reversions, underscoring that the Singapore office sector still “favours the landlord”.
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Its Blue & William property in Sydney will also start contributing positively to Keppel REIT’s bottomline post the recent completion, he adds.
DBS analysts note that the REIT’s Singapore vacancies are now almost fully backfilled with tenants progressively moving in this year. Meanwhile, “good leasing interests” in the Singapore portfolio and Keppel REIT’s tech tenants are expanding instead of contracting work forces, according to management.
However, the way OCBC analysts see it, while they expect Keppel REIT to be a beneficiary of the office rental upcycle in Singapore as evidenced by the positive operating metrics for the quarter just passed, there are still downside risks from the softening macroeconomic environment, with headwinds rising borrowing costs expected to weigh on its growth.
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They note that its aggregate leverage ratio inched up to 38.7%, while borrowing costs also “unsurprisingly” increased by 0.3% points q-o-q to 38.7%, with 75% of its borrowings on fixed rates.
They add that while the REIT’s rental reversions were solid at 9.3% for the quarter, they are likely to moderate for the remainder of FY2023.
According to CBRE Research’s data, core CBD Grade A office rent increased at a slower pace of 0.4% q-o-q in 1QFY2023 to $11.75 per sqft per month, close to the $11.66 per sqft per month average expiring rents for Keppel REIT’s Singapore office leases, suggesting that rental reversions are likely to moderate ahead, says OCBC.
RHB’s Natarajan explains that the REIT’s decline in 1QFY2023 operational distributable income came mainly on the back of lower associate contributions and higher financing costs.
Including the previously announced $5 million of anniversary distributions this year, amounting to a total of $20 million per annum over five years, the final distributable income was up 2.6% y-o-y.
Even with the “partial mitigation” of the anniversary distribution, Keppel REIT’s 1QFY2023 estimated dividends per unit (DPU) still came in 8% lower y-o-y at 1.34 cents, slightly below DBS's estimates.
Still, Natarajan says Keppel REIT’s gearing remains comfortable at below 40% with only a small refinancing pending later this year, while the resumption of the share buyback during the quarter will offer downside support amidst market volatility.
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Some 9.5 million units or around 0.3% of total units were purchased and cancelled during the quarter at an average estimated unit price of some 86 cents.
“Management noted that the share buyback is an affirmation that it sees good value in its units at current levels of around 35% below book value, while physical assets are generally transacting at a premium to valuations. It will selectively look into acquisition or divestment opportunities in the market,” Natarajan explains.
He notes the REIT’s overall all-in interest costs rose some 57 basis points (bps) q-o-q to 2.86% per annum, with 75% of its debt currently hedged and adjusted interest cover remaining healthy at 3.2x.
For Citi’s Lee, although Keppel REIT has underperformed S-REITs year-to-date (ytd) due to concerns over interest coverage ratio (ICR) and globally weak investor sentiments towards office proxies, he believes current valuations at a 0.65x price-to-book value ratio (P/BV) and 6.6% and 6.7% FY2023 and FY2024 yields have “priced in a majority of the negatives”.
He sees the REIT’s share buyback and asset divestments as share price catalysts that could narrow the cost of equity (COE) and net asset value (NAV) discount.
Meanwhile, DBS expects the share buyback to continue as Keppel REIT focuses on asset and capital management. “Given the current challenging environment, management is focused on asset and capital management while keeping an eye for acquisition and divestment opportunities. Share buyback will likely continue if the share price continues to trade at a deep discount to NAV,” it writes.
For OCBC, potential catalysts for the REIT include a tighter-than-expected office space supply leading to higher rental reversions, stronger-than-expected demand for office space and a faster-than-expected US Fed rate hike pivot, leading to lower borrowing costs.
On the other hand, investment risks include a faster-than-expected slowdown in macroeconomic conditions, a protracted high interest rate environment that could raise refinancing costs for maturing debt and currency exposure from Keppel REIT’s holdings in Australia, South Korea and Japan.
As at 3.21pm, shares in Keppel were trading 0.5 cents or 0.56% down at 89 cents.
