Keppel REIT’s Q2 Performance in Line, but Rising Interest Rates Weigh on FVE

Keppel REIT continues to benefit from the improving Singapore office market, as it registered a decent set of results for the second quarter. Building on its strong operating performance in the first quarter, the trust maintained its high tenant retention ratio of 89% with a positive 8.7% rental reversion. Notably, rental reversions for its Singapore central business district properties went into the double digits at positive 11%. These were largely within our expectations and helped to dispel concerns that the heightened recession risk and cutting of head count by technology companies may derail the office recovery narrative. However, we are raising the exit cap rate used to compute the terminal value of Keppel REIT’s office assets on the back of the more aggressive U.S. federal-funds rate hikes to combat inflation. Hence, we have lowered our fair value estimate to SGD 1.16 per unit from SGD 1.38. This implies a forward distribution yield of 5.1% and price/book value of 0.9 times. In our view, the trust is undervalued currently, and we continue to like the trust for its long-weighted average lease expiry of six years, high-quality Grade A office assets, and exceptional tenant register.