RHB Investment Research Reports

Keppel REIT - a Good Quarter; BUY

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Publish date: Wed, 24 Apr 2024, 11:20 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

All materials published here are prepared by RHB Investment Bank Bhd. For latest offers on RHB Invest trading products and news, please refer to: http://www.rhbinvest.com

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  • 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

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