• Maintain BUY and SGD1.08 TP, 27% upside and c.7% yield. Keppel REIT’s 1Q financial metrics came in line. Operationally, its portfolio continues to show strength despite market concerns over the office sector with stronger- than-expected double-digit rent reversions and stable occupancy. The latest yield-accretive acquisition of an Australian asset is opportunistic, and likely to be funded by proceeds from divestments – keeping gearing below 40% levels. KREIT trades at a hefty >35% discount to book value, which we believe presents a good medium-term buying opportunity.

• Healthy positive double-digit rent reversion of 10.9% (FY23: +9.9%), driven by higher renewal rents in Singapore and Australia. Similar to its peer, KREIT highlighted continued strength in Singapore office demand and increased its guidance for full-year rent reversions to mid-to-high single digits (from low single digits earlier). Average expiring rents for Singapore office leases for FY24-26 are still 10%, 10%, and 3% below the latest average signing rents, with <10% of lease expires in any single year until 2028.

• Portfolio occupancy dipped slightly to 96.4% (FY23: 97.1%), mainly on non- renewal of an anchor tenant at 8 Exhibition Street, Melbourne. KREIT is in advanced stages of backfilling half of the space and marketing the remainder – it expects positive rent reversions on these. For Singapore, while media sources have highlighted the possibility of one of its top 10 tenants – BNP Paribas (3% of gross rents) – giving back space later this year, management remains confident of demand and expects occupancy to be stable. 1Q office demand came mainly from the legal and financial services segments.

• The T-Tower divestment is at advanced stages based on The Korea Economic Daily, with c.10 buyers having expressed interest. T-Tower was valued at KRW305.8bn (c.SGD302m) as at end Dec 2023 and, considering the healthy bidding interest, we believe the asset could potentially be sold at a 5-15% premium to its latest valuation. The proceeds are likely to be recycled to fund the recent 255 George Street acquisition (50% stake) for AUD364m (SGD321m), which should keep gearing at c.39% levels.

• Distributable income (1Q) stood flat, as increases in net property income (+7% YoY) were offset by higher financing costs. All-in, interest costs rose to 3.18% pa (FY23: +2.89%) and, for the full year, we expect this to be at mid- 3% levels. Around 74% of KREIT’s debts are hedged, with an average weighted debt maturity of 2.3 years.

• No changes to estimates. As KREIT’s 3.2 ESG score is a notch above the 3.1 country median, a 2% ESG premium is applied to our DDM-derived TP. Key risks include prolonged high interest rates and the economy slowing down, resulting in a weakening of office demand.

Source: RHB Research - 24 Apr 2024