Analysts are largely positive on Keppel REIT in light of good leasing activity and healthy gearing levels, following the REIT’s latest business update.
Maybank Research analyst Chua Su Tye upgraded Keppel REIT to a “buy” rating from “hold”, with an increased target price of $1.30 from $1.20.
KREIT’s 1QFY2022 ended March distributable income rose 4.3% y-o-y to $53.8 million, while net profit interest (NPI) rose 8.6% y-o-y, as the Keppel Bay Tower acquisition helped offset its 275 George St, Brisbane divestment in July 2021. KREIT also reported a gross revenue of $54.5 million, up 6.7% y-o-y.
See: Keppel REIT's distributable income rose 4.3% y-o-y in 1QFY2022
“Office demand tailwinds have strengthened its fundamentals, and we raise distributions per unit (DPUs) by 3-5%, on the back of improving occupancy and accelerating rents,” says Chua. “Leasing velocity is strong, and we see over $500 million in capital distributions cushioning downtime and DPUs.”
The analyst sees a favourable risk-reward, at 5.1% FY2022 dividend yield and 3.5% two-year DPU CAGR, with limited downside from interest rate and cost sensitivities.
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In addition, leasing activity rose to 475,000 sq ft from approximately 298,000 sq ft in 4QFY2021, with new demand and expansion led by real estate & property at 43%, manufacturing and distribution at 23%, as well as banking, insurance and financial at 13% sector tenancies.
KREIT also witnessed a stronger rental reversion outlook which improved to +7.9% in 1QFY2022, from +1.9% in 2HFY2021 with average signing rents of $11.15 per sq ft per month (psfpm), as compared to $10.56 psfpm in 4QFY2021 and $10.30 psfpm in 3QFY2021. The management guides a mid-to-high single-digit positive rental reversion into FY2022, from low-to-mid single-digit, helped by low $10.10 psfpm expiring rents, and backfilling of DBS and SCB vacancies at Marina Bay Financial Centre.
However, portfolio occupancy was lower at 95.1% from 95.4% in 4QFY2021 as One Raffles Quay fell from 98.5% to 95.8% as an existing tenant moved to a larger space in the property, with backfilling efforts underway.
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“With 1.9% of vacancies under documentation, we see occupancy climbing to approximately 97% in coming quarters,” says Chua. This is considering how utility costs are passed through in Australia and South Korea, but delivered on fixed-rate contracts in Singapore, with the first expiring at year-end as compared to others in 2023 and 2024, and management estimates DPUs could fall 1%-2% based on current prices.
Nevertheless, gearing was stable at 38.7% as compared to 38.4% as at end Dec 2021, while its interest cost fell to 1.81% from 1.98% for FY2021, with an issuance of a $150 million 7-year medium-term note (MTN) at 2.07% in Sept 2021. The management lifted its fixed-rate borrowings to 71% (from 63%), and expects that a 50 bps hike in borrowing cost could lower DPUs by 2.4%. Its balance sheet remains strong, with an estimated $1.5 billion in debt headroom at 50% limit.
“While we expect management to continue to eye assets under management (AUM) growth in core markets, deal visibility is low amid interest rate volatility,” says Chua.
Similarly, RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on KREIT with an increased target price to $1.31 from $1.29.
Natarajan likes the stock for its positive results in 1QFY2022, which saw distributable income increasing by 4.3% y-o-y, thanks to acquisitions and lower interest costs, which brought DPU to 1.45 cents, respresting about 24% of his full-year forecast. Overall, interest costs were lowered 17 bps q-o-q to 1.81% per annum, with about 200,000 rent rebates granted in 1QFY2022 to ancillary retail tenants.
Moreover, utility rates in Singapore are hedged until the end of this year with staggered expirations: One at the end of 2022 and the others in 2023-2024. Thus, no impact is expected from rising utility charges this year with management guiding for 1about % impact to DPU next year, should utility rates remain at the current elevated levels.
With physical occupancy at its Singapore office assets reaching approximately 60% levels following recent easing measures which allows up to 75% of employees to return to offices, Natarajan remains optimistic on a positive demand outlook in terms of portfolio occupancy moving forward.
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Furthermore, the REIT’s management has guided for stronger rent reversions, as it expects positive mid to high single digit growth for FY2022, an improvement from low to mid-single digits previously. This is thanks to stronger demand and limited supply in the market. Keppel REIT also has quite sizeable past divestment gains of over $100 million, which the analyst believes can be distributed to offset some of the void from the transition period in office leases.
Meanwhile, CGS-CIMB Group Research analysts Lock Mun Yee and Eing Kar Mei have kept an “add” rating on Keppel REIT with an unchanged target price of $1.29.
In spite of a slight portfolio slip at end 1QFY2022, Lock and Eing believe that portfolio committed occupancy is likely to trend up in coming quarters, considering new leasing demand coming from real estate, manufacturing and distribution, financial services and consultancy sectors.
KREIT’s aggregate leverage stands at 38.7% as at end 1QFY2022 with average all-in interest cost of 1.81%. An estimated 71% of its debt are on fixed rates and about 48% of its total debt are green loans.
In April, $146.5 million of KREIT’s convertible bonds due 2024 were redeemed and funded through loan facilities, maturing in 2026-2027. Furthermore, management guided that a 50 bps hike in funding cost could erode its DPU by 0.14 cents, or approximately 2.4% of FY2021 DPU.
“With its strong balance sheet, we believe KREIT is in a strong position to continue to evaluate accretive inorganic growth opportunities, particularly in Australia and Singapore,” say the analysts.
Some downside risks considered by Lock and Eing include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of office space.
As at 5.12pm, KREIT is trading at 2 cents up or 1.68% higher at $1.21 at a FY2022 P/B ratio of 0.92x and dividend yield of 4.87%.
