Keppel REIT: Operating Metrics Continue to Improve; Units Undervalued

Keppel REIT’s K71U third-quarter business update was in line with our expectations, and we maintain our fair value estimate of SGD 1.16 per unit. Based on the last closing price of SGD 0.84 per unit, we think the trust is undervalued and trades at an attractive 2024 dividend yield of 7%. We continue to like the trust for its exceptional tenant register that includes government agencies and government-linked companies, which can weather any possible economic downturn.

The trust posted improving operating metrics with the portfolio occupancy rate moving 1 percentage point higher, quarter on quarter, to 95.9%. The trust also recorded higher positive rental reversions of 10.6% for its Singapore assets in the Central Business District for third-quarter 2023, higher than the positive 8% clocked in first-half 2023. Keppel REIT also managed to improve the respective occupancies of KR Ginza II and Blue & William to 74.5% and 42.5% this quarter from 36.3% and 37.7% in the previous quarter. Looking ahead, we expect the trust to continue to record improving occupancy rates and strong rental reversion numbers given its high-quality office portfolio that attracts strong occupier demand.

Positives aside, we are raising our near-term borrowing cost following management guidance that the cost of debt will rise to the mid-3% region for 2024 from the 2.85% as at end-September 2023. We also added SGD 30 million to the purchase consideration of Blue & William due to the positive leasing news shared by management. To recap, Keppel REIT’s acquisition of Blue & William comes with a price adjustment clause based on the actual rents achieved. As rentals for the leases signed have been above the initial assumptions, we expect the trust will need to fork out additional payment to the vendor, Lendlease. Our fair value estimate remains unchanged following the revisions but our dividend per unit assumptions for 2023, 2024, and 2025 are lowered by 0.5%, 2.7%, and 0.7%, respectively.