Keppel REIT: Business Update in Line With Expectations; Units Undervalued

The higher interest rate environment is starting to negatively affect Keppel REIT K71U 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.

As the business update was largely in line with our expectations, we retain our fair value estimate of SGD 1.16 per unit. Based on its last closing price of SGD 0.895, we think that the trust is undervalued and trades at an attractive 2023 distribution yield of 6.6% (including its anniversary dividend top-up). We continue to like the trust for its high-quality grade A office assets and exceptional tenant register, that includes government agencies and government-linked companies, and which can weather any possible economic downturn.

Management resumed its units buyback exercise this quarter, purchasing and canceling 9.5 million units (making up 0.3% of its total unit base). Although the buyback amount is small, it sends a positive signal, implying the units are currently undervalued. We are largely positive on this move as the trust is currently trading at a 35% discount to its end-2022 book value and at 0.77 times of our fair value estimate. In our opinion, units buyback in the current environment where good acquisition opportunities are limited due to tight cap rates and high cost of debt, is a good way to return value to unitholders as it has a positive effect on distribution per unit.