• Stay BUY, with new SGD1.08 TP from SGD1.10, 17% upside and c.6% yield. 1H results were slightly below on higher interest cost. Portfolio value on the other hand remained largely stable underpinned by healthy demand for good quality office assets in Keppel REIT’s markets. Operational performance remained robust with a slight QoQ occupancy increase and rent reversions in high single digit. The REIT remains an undervalued office play, trading at >30% discount to book value, with a 6% dividend yield.

• 1H DPU was lower 2.4% YoY as higher rental income from its assets were offset by higher borrowing and operating expenses. Distributable income (1H) included SGD10m of anniversary distributions, excluding which, operating DPU was lower 11% YoY mainly dragged down by interest costs which rose 26% YoY. KREIT conducted a mid-year portfolio revaluation which saw a slight uplift (0.5%) in Singapore property value on the back of higher rents with cap rates remaining steady. Its Australia portfolio saw a slight valuation decline (particularly Pinnacle Office Park: -13% in AUD terms) from cap rate increases, offset by an uplift from the completion of Blue & William (B&W), resulting in an overall stable portfolio valuation.

• 2Q rent reversion remains high at 7.7% (1Q: 9.3%) as office rents in Singapore and Australia remain on an uptrend despite the economic slowdown. For 2H, only 4% of leases are due for renewal and we expect rent reversion to remain in positive mid-single digit. B&W in Sydney achieved practical completion in Apr 2023. Current occupancy stands at 37.7% with ongoing negotiations for few other leases and rents achieved so far are above initial expectations. The asset has a 3-year rent guarantee for any unlet space as part of the development agreement. Portfolio occupancy (excluding B&W) inched up 0.1ppt QoQ to 98% as Singapore assets continued to see robust demand. Leasing momentum (1H) remained fairly healthy at c.0.9m sqf of leases signed with 60% being new demand.

• Share buybacks continue to support, with the REIT buying back and cancelling 19.5m units in 1H (2Q: 10.2m units) and management signalling that it continues to see good value in its shares. Gearing has inched up to 39.2% (from 38.4% as at end last year) with the final payment of B&W. Interest cost has risen 55bps since 4Q22 to 2.84% pa and is expected it to move 30-40bps higher in 2H. 76% of its borrowings are currently hedged with the next major refinancing only due in 2Q24. In terms of strategy, management said it will continue to look out for divestment opportunities and recycle capital into higher yielding assets.

• We trim our FY23F-24F DPU by 2% and 3% by fine-tuning higher our interest cost assumptions. KREIT’s ESG score of 3.2 (out of 4.0) is two notches above the country median. Thus we apply a 4% ESG premium.

Source: RHB Research - 26 Jul 2023