Keppel REIT: Santa is coming early next 5 years!
- 20-year anniversary reward to shareholders with S$100m capital distribution over next 5 years. A bold move that will be well received by shareholders
- 3Q22 estimated DPU is in line; stable performance but rising cost of debt is now above 2%
- Riding on Singapore office upcycle to lock in leases as quickly as possible; very strong double-digit reversions and vacancies largely backfilled
- Maintain BUY; lower TP to S$1.15
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- KREIT surprised shareholders with the declaration of S$100m from accumulated capital gains to be distributed over the next five years leading up to its 20th anniversary in 2026. We believe this is a bold (and rare) move from management to reward and share its years of gains accumulated from its asset recycling strategy with shareholders, especially in such a challenging environment. We believe this is a strong testament from management that it is exercising duty of care and loyalty to all stakeholders who have been supportive of the company. S$20m per annum translates to c.0.5 Scts per share.
- The 20-year anniversary reward is considered separately and is over and above any normal capital distribution that KREIT typically reviews on a regular basis. Currently, KREIT has more than S$400m in capital gains in the books.
- 3Q22 estimated DPU is stable y-o-y at 1.47 Scts, in line with our estimates.
- Gearing inched up marginally to 38.4% vs. 37.9% in 2Q22 and the interest rate hedge ratio remained stable at 72% vs. 73% 2Q22.
- All-in cost of debt has risen above 2% at 2.13% in 3Q22 vs. 1.93% in 2Q22 due to rising interest rates. There is no debt refinancing remaining in FY22 and management expects to refinance debt expiries (19% of total debt) by early next year.
- Income from Australia and South Korea is hedged for up to 18 months.
Riding on strong Singapore office upcycle and locking in leases as quickly as possible.
- Portfolio occupancy improved further to 96.8%, mainly from Singapore office. Management continues to ride on the strong leasing trend in Singapore to lock in leases, driving up occupancy in its Singapore portfolio to 98.2% (average). Australia, on the hand, experienced slightly slower activities, possibly due to the wet weather recently, but rents and incentives have been trending upwards.
- Singapore vacancies are now almost fully backfilled. i) the DBS space is fully leased out and MBFC’s occupancy has reached 98.6% in 3Q22, ii) SCB’s space is now 40% committed (one-third backfilled in 2Q22) with another 30% under advanced negotiations and documentation, and iii) 8 Chifley’s occupancy remained stable q-o-q at 82%, and given softer leasing activities in 3Q22, management is considering building spec suites to cater to demand for smaller spaces.
- Strong positive rental reversions remain for Singapore at 9.7% in 3Q22. Singapore reversions remained strong at +9.7% in 3Q22. Excluding a large tenant that expanded its space and renewed its lease early, rental reversions would have been more than 14% vs. 11% in 1H22.
- Management continues to be positive on the Singapore office sector despite tech demand having moderated and looks to lock in leases as quickly as possible as it leverages on the Singapore office upcycle. Given its leasing strategy, management expects some occupancies to hit 100% soon.
- Leasing activities have started for Blue & Williams, which is already in advanced negotiations with a few prospective tenants. The building reached structural completion in Sep 22 and is on track to be completed by mid-2023.
- KREIT had previously raised its service charge by 25 Scts in ORQ and MBFC to offset higher costs. It expects to roll out to OFC and Keppel Bay Tower from Nov 22 onwards.
- Physical occupancy in Singapore has risen to an average of 70% to 80%, while Australia is still trending at 35% to 45%.
Maintain BUY; lower TP to S$1.15. We maintain our BUY rating but lower our TP to S$1.15 from S$1.40 to factor in higher risk-free rates, floating rates, and refinancing rates. Despite higher financing costs, we revised upwards our FY22F-FY23F DPU estimates by 0.5% to 1.8% to factor in the 20-year anniversary reward.
Despite the challenging environment and an uncertain macroeconomic outlook, we believe the management of KREIT is making all the right moves to ensure the resilience of the portfolio, riding on the current Singapore office upcycle as it prepares to weather a “rainy” day.
With the heightened capital distribution, KREIT is offering a 7% 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 – very attractive valuation levels, in our view.
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