Company Reports

We maintain our fair value estimate of SGD 1.16 per unit for Keppel REIT after the trust’s in-line first-quarter 2024 business update. Net property income grew 7.2% year on year on the back of higher rentals from Ocean Financial Centre and contributions from 2 Blue St., which completed its development in April 2023. However, distributable income remained flat year on year due to higher borrowing costs. The portfolio occupancy rate stayed healthy at 96.4% as of March 31, 2024, and the trust registered a positive rental reversion of 10.9% during the quarter. That said, occupancy rates for two of its Australian properties, 8 Exhibition St. and Pinnacle Office Park, were below 90% as of March 31, 2024. For 8 Exhibition St., the drop in occupancy was due to a major tenant's nonrenewal. Management said that half of the vacated space is under negotiation and it hopes to lease the vacant space by the end of 2024. As for Pinnacle Office Park, the trust completed the speculative suites' fitout in February 2024, ahead of schedule. According to management, the suites are being well received by prospective tenants, and more than half of the space has been committed or is under offer.

Keppel REIT is acquiring a 50% interest in 255 George Street, a Grade A office building in the central business district, or CBD, of Sydney, Australia, for SGD 321 million. The asset is currently 93% occupied, and the seller is providing up to SGD 46.8 million of rental guarantee, lease incentives, and committed capital expenditures. Management guided for the first-year yield to be about mid-6%, and it expects a distribution per unit, or DPU, accretion of 1.4%. After the acquisition, management expects gearing to rise to 41% from 38.9% as of December 2023. After updating our model for this transaction, we retain our fair value estimate of SGD 1.16 and raised our DPU estimates for fiscal 2024-26 by 0.7% to 2.2%. Keppel REIT remains our top pick for Singapore REITs for its high-quality office portfolio and attractive dividend yield of 6.6%. Overall, we are positive on this transaction as it is yield-accretive, has a long lease expiry profile of 6.8 years, and has a solid tenant register including the Australian Taxation Office and Bank of Queensland.

Keppel REIT is a pure-play commercial real estate investment trust with SGD 9.2 billion of office assets (as of Dec. 31, 2023) spread across Singapore, Australia, South Korea, and Japan. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables Keppel REIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

Keppel REIT's second-half 2023 earnings were in line with our expectations, with higher borrowing costs and a larger share base negating the growth in net property income and resulting in distribution per unit, or DPU, declining 1.7% year on year. The trust's operating metrics remain robust, with high portfolio occupancy rate of 97.1% as of year-end 2023. Management guided a mid- to high-single-digit positive rental reversion for 2024, but we think the growth will be offset by high borrowing cost. As 75% of the trust's total borrowings are fixed-rate debt, this may preclude it from fully enjoying the benefit of upcoming interest rates cut in 2024. As such, we forecast its DPU to stay flat for 2024 before growing 5.8% and 3.8% year on year for 2025 and 2026 due to lower financing expenses. We maintain our fair value estimate of SGD 1.16 and continue to recommend Keppel REIT as our top pick among Singapore REITs.

Keppel REIT is a pure-play commercial real estate investment trust with SGD 9.2 billion of office assets (as of Dec. 31, 2023) spread across Singapore, Australia, South Korea, and Japan. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables Keppel REIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

Keppel REIT’s 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.

Keppel REIT is a pure-play commercial real estate investment trust with SGD 9.2 billion of office assets (as of Dec. 31, 2022) spread across Singapore, Australia, South Korea, and Japan. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables Keppel REIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

Sabana REIT’s unitholders have voted to remove ESR Group as its manager and internalize the REIT management function. This move is unprecedented in Singapore, but we think it has positive implications for the industry. This event occurred because activist investor Quarz Capital led the push. As ESR Group holds around 21% of Sabana REIT compared with Quarz Capital’s 14%, ESR Group only held a slight advantage going into the vote. Ultimately, we think ESR Group lost the vote because of concerns about potential conflicts of interest—ESR Group is the sponsor of more than one industrial REIT in Singapore—and the perception that Sabana REIT has underperformed its peers due to poor management by ESR Group.

Keppel REIT’s first-half 2023 was in line with our expectations, with net property income, or NPI, inching up 0.4% year on year to SGD 89.9 million, making up 47% of our full-year estimate. The trust’s Singapore properties performed well, underpinned by strong positive rental reversions and higher occupancy rates. Notably, Ocean Financial Centre’s and Keppel Bay Tower’s first-half 2023 NPI grew 6.8% and 11.4% year on year, respectively. However, the appreciation of the Singapore dollar eroded the NPI returns of its overseas investment, resulting in an overall flat NPI performance for the trust. Distribution per unit fell 2.4% year on year to SGD 0.029 even after including the anniversary distribution, due to higher borrowing cost. With no major surprises, we keep our fair value estimate of SGD 1.16 per unit. Based on its last closing price of SGD 0.93, we think that the trust is undervalued and trades at an attractive 2023 distribution yield of 6.3%. We continue to like the trust for its high-quality grade A office assets and exceptional tenant register, which includes government agencies and government-linked companies, which would likely weather any possible economic downturn.

Keppel REIT is a pure-play commercial real estate investment trust with SGD 9.2 billion of office assets (as of Dec. 31, 2022) spread across Singapore, Australia, South Korea, and Japan. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables Keppel REIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

The higher interest rate environment is starting to negatively affect Keppel REIT as its distributable income from operations fell 6.7% year on year to SGD 50.2 million despite a 1.8% increase in net property income in first quarter 2023. Nevertheless, the trust’s operating metrics remain strong, with a high tenant retention ratio of 98% and a positive 9.3% rental reversion for the portfolio. The trust’s portfolio occupancy rate was 96.3%, same as last quarter, while its weighted average lease expiry remains long at 5.8 years.

Keppel REIT’s second-half 2022 results were largely in line with our expectations, with net property income decreased by 1.9% year on year to SGD 86.5 million on the back of a 1.2% decrease in revenue to SGD 109.5 million. The decline is mainly driven by lower income contribution from Pinnacle Office Park and T Tower, and the weaker Australian dollar and South Korean won. Nevertheless, second-half distributable income and distribution per unit, or DPU, increased 3.7% and 2.4%, respectively, year on year, to SGD 110.4 million and SGD 0.0295 after including a distribution top up of SGD 10 million.

Keppel REIT is a pure-play commercial real estate investment trust with SGD 9.2 billion of office assets (as of Dec. 31, 2022) spread across Singapore, Australia, South Korea, and Japan. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables Keppel REIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

Keppel REIT, or KREIT, will be acquiring a boutique office building located in Tokyo’s Chuo ward with its sponsor, Keppel Capital, for a total purchase consideration of JPY 8.97 billion. KREIT’s effective stake will be 98.47%. Although the deal is relatively small, making up only 1% of KREIT’s assets under management on completion, it marks KREIT’s entry into Tokyo, Japan, the biggest central business district, or CBD, office market in the Asia-Pacific region. The property is only 36.3% occupied and management expects it to achieve a net property income, or NPI, yield of 3.1% when it is fully leased, giving a distribution per unit, or DPU, accretion of 0.5% on a pro forma basis, assuming the acquisition was completed from Jan. 1, 2021.

Keppel REIT‘s third-quarter 2022 distributable income of SGD 165.4 million was in line with our expectation as the trust continues to benefit from the strong Singapore central business district, or CBD, Grade A office market. The trust’s operating metrics remain robust, with portfolio occupancy improving to 96.8% this quarter from 95.5% in the previous quarter and tenant retention rate remaining high at 82%. On its rental reversion, management highlighted that they would have achieved an extremely strong positive 14% rental reversion for this quarter had they not brought forward the renewal of a large lease expansion, bringing rental reversions down to a positive 9.7% (still a huge positive in our view).

Keppel REIT is a pure-play commercial real estate investment trust with SGD 8.9 billion of office assets (as of March 31, 2022) spread across Singapore, Australia and South Korea. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables Keppel REIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

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.

Keppel REIT is a pure-play commercial real estate investment trust with SGD 8.9 billion of office assets (as of March 31, 2022) spread across Singapore, Australia and South Korea. Most of its assets are income-producing, with one office building in Sydney currently under development. Most of its assets are Grade A office buildings located in central business districts, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables KREIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

Keppel REIT, or KREIT, is a pure-play commercial real estate investment trust with SGD 8.9 billion of office assets (as of March 31, 2022) spread across Singapore, Australia and South Korea. Most of its assets are income-producing, with one office building in Sydney, Australia currently under development. Most of its assets are Grade A office buildings located in the central business districts, or CBD, where they are highly coveted for quality office space and proximity to businesses and key transport nodes. This enables KREIT to command premium rent while maintaining high occupancy rates. In addition, its tenant base is one of the best in class, with government agencies and international banks in its register.

No-moat Keppel REIT’s first-quarter 2022 results were largely in line with our expectations. Some of the positive takeaways include high tenant retention ratio of 91% on the back of a positive 7.9% rental reversion. As 99% of the leases committed are from Singapore, we see this as a clear signal of a recovery in Singapore’s office market, as highlighted in our previous note. Portfolio operating metrics remain stable with occupancy rates, while its weighted average lease expiry, or WALE, remains long at 6.1 years. We keep our lease up assumptions, with leasing velocity improving in the second half of the year and our expectation that tenant retention ratio moderates back to the 70% to 80% level in the next few quarters. We maintain our SGD 1.38 fair value estimate and think the shares are undervalued currently. We continue to like the trust for its long WALE, high-quality Grade A office assets, and exceptional tenant register.