Keppel REIT: First Ang Pow distributed
- FY22 DPU +1.7% y-o-y to 5.92 Scts (slightly below our estimates) included first tranche of Anniversary Distribution of S$10m
- Key positives: i) Singapore portfolio recorded >20% positive reversions in 4Q22; ii) vacancies largely backfilled except at 8 Chifley
- Key data to watch: i) expect Singapore office to remain firm while Australia appears to have stabilized; ii) higher interest costs
- Maintain BUY; TP of S$1.15
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- FY22 DPU grew 1.7% y-o-y to 5.92 Scts, slightly below our estimate. 4Q22 estimated DPU grew 5% y-o-y (+0.7% q-o-q) to 1.48 Scts, mainly supported by the first tranche of the Anniversary Distribution of S$10m, partially offset by higher interest cost, forex impact and lower contributions due to vacancies (8 Chifley and MBFC).
- Gearing held stable q-o-q at 38.4% and interest rate hedge ratio increased to 76% from 72% in 3Q22.
- All-in cost of debt increased by 0.16ppt to 2.29% vs 2.13% in 3Q22 due to rising interest rates. Cost of debt as at 4Q22 was 2.5% and expect to rise closer to 3% post refinancing in FY23.
- In Jan23, S$486m of loans maturing in 2023 have been refinanced, extending maturities by 5 years to 2028. As a result, the remaining maturing loans in FY23 is S$156m (c.4% of total debt).
- 50% to 80% of KREIT’s foreign income is typically hedged for 6 to 18 months forward.
Recorded strong 4Q22 double digit positive reversions in Singapore portfolio; expect Singapore to remain firm while Australia appears to have stabilised.
- Portfolio occupancy held relatively stable at 96.3% (vs 96.8% in 3Q22) mainly from Singapore office. Most properties saw stable to slightly higher occupancies except MBFC (the return of SCB’s space in Oct22) and newly acquired Japan asset at 36.3%.
- Singapore vacancies are now almost fully backfilled. i) SCB’s space is now 80% backfilled vs 40% backfilled with 30% under advanced negotiations in 3Q22, ii) 8 Chifley’s occupancy remained stable q-o-q at 82% given softer leasing activities in 2H22.
- Singapore recorded strong positive reversions of 23.4% in 4Q22 vs 9.7% in 3Q22; expect reversions to moderate to mid to high single digit in FY23. According to management the double-digit reversions were broad based with possibly some impact from leases signed to backfill SCB’s space.
- Singapore office to remain firm; expect mid-to-high single digit positive reversions in FY23. Management believes the leasing demand in Singapore will remain firm and expects to continue to enjoy positive reversions though moderated to mid-to-high single digit. Despite slower leasing activities in 4Q22, management continues to see demand from family offices and some spillover / relocation demand from Hong Kong and China.
- Tech slowdown / layoffs yet to impact KREIT; no increase in shadow space. Despite the tech slowdown and announced layoffs that could have impacted office sentiment, management said there has not been any impact on KREIT’s portfolio thus far and no increase in shadow space. However, management will continue to monitor the status on shadow space.
- Australia office market appears to have stabilised with some uptick in rental rates and incentives have bottomed. Management believes the Australia office market appears to have stabilised with some uptick in rental rates in 4Q22 seen in Sydney and Melbourne markets. Incentives appears to have stabilised and are trending downwards from 30% or more in the Sydney market.
- Blue & Williams secured its first anchor tenant, Equifax, a global data analytics and technology company. Equifax will occupy c.4,350sqm across 5th to 7th floor, contributing slightly over 30% of pre-committed occupancy. Blue & William is on track to complete by mid-2023 and Equifax will move in from end 2023.
- Portfolio valuation (excluding KR Ginza II and Blue & William) increased by 0.6% vs Jun22 valuation, held up by Singapore assets offset by lower valuation from overseas assets. Singapore portfolio’s valuation increased by 2.3% and cap rates held relatively stable except OFC saw cap rates compression by 10bps. Australia portfolio (ex-Blue & William) recorded a 6.4% decline mainly due to lower foreign exchange rates. In AUD terms, Australia portfolio (ex-Blue & Williams) was relatively stable despite 12bps to 13bps expansion in cap rates. 8 Chifley Square and Pinnacle Office Park saw valuation decline (in AUD terms) of 3.2% and 2.6% respectively. Similarly, T Tower (-6% in SGD terms) was impacted by foreign exchange.
- Keeping an eye for asset recycling opportunities but mindful of higher funding costs.
Maintain BUY; TP of S$1.15. We maintain our BUY rating and TP of S$1.15. We have trimmed our FY23F-FY24F DPU by 5% to factor in no additional capital distributions aside from Anniversary Distribution and some moderation of earnings.
Despite slower economic growth and an uncertain macroeconomic outlook, we believe KREIT’s best-in-class office portfolio will be able to weather a “rainy” day and continue to enjoy a firm Singapore office market while it awaits a stronger recovery in the Australian office market.
KREIT is offering an attractive 6.2% FY23F yield and trading at 0.7x P/B, slightly below -1SD of its historical range and close to trough levels in the past five years.
| FY Dec | 2Q2019 | 1Q2020 | 2Q2020 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Gross revenue | 39.9 | 38.7 | 36.8 | (7.9) | (5.0) |
| Property expenses | (8.85) | (8.55) | (7.96) | (10.1) | (6.9) |
| Net Property Income | 31.1 | 30.2 | 28.8 | (7.2) | (4.5) |
| Other Operating expenses | (20.6) | (13.3) | (13.4) | (34.7) | 1.2 |
| Other Non Opg (Exp)/Inc | (5.61) | (7.09) | 9.22 | - | (230.1) |
| Net Interest (Exp)/Inc | (10.1) | (6.97) | (7.74) | 23.6 | (11.1) |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | - | |
| Net Income | 21.7 | 28.8 | 45.1 | 108.0 | 56.9 |
| Tax | (1.31) | (1.76) | (1.43) | 8.9 | (18.8) |
| Minority Interest | (3.40) | (3.76) | (3.53) | (3.8) | (6.0) |
| Net Income after Tax | 15.1 | 21.4 | 38.3 | 153.3 | 79.2 |
| Total Return | 15.1 | 21.4 | 38.3 | 153.3 | 79.2 |
| Non-tax deductible Items | 32.2 | 25.9 | 9.15 | (71.6) | (64.7) |
| Net Inc available for Dist. | 47.3 | 47.3 | 47.5 | 0.4 | 0.3 |
| Growth & Ratio | |||||
| Net Prop Inc Margin (%) | 77.8 | 77.9 | 78.4 | ||
| Dist. Payout Ratio (%) | 100.0 | 100.0 | 100.0 |
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