Keppel REIT Earnings: Leasing Strong Despite Weaker Economic Outlook; Units Undervalued

Keppel REIT’s K71U 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.

The trust’s portfolio occupancy rate fell to 94.9% in second-quarter 2023 from 96.3% in the previous quarter, following the completion of Blue & William in April 2023. According to management, Blue & William secured its second tenant from the banking sector and increased committed occupancy to 37.7%. Positively, the leases secured were also 8%-12% above management’s initial assumed rents. Excluding Blue & William, the portfolio occupancy rate would have improved to 97%, with Ocean Financial Centre hitting 100% occupancy, while 8 Chifley Square secured a new government tenant taking up close to 100,000 square feet of space. The trust also achieved positive rental reversions of 7.7%, moderating from the previous quarter’s 9.1%. We think these are a testament to the trust’s portfolio quality.