Keppel REIT - DBS Research 2022-10-26: Santa Is Coming Early Next 5 Years!

Keppel REIT - Santa Is Coming Early Next 5 Years!

  • Keppel REIT (SGX:K71U) surprised shareholders with the declaration of S$100m from accumulated capital gains to be distributed over the next five years leading up to its 20th anniversary in 2026. S$20m per annum translates to ~0.5 cents per share.
  • The 20-year anniversary reward is considered separately and is over and above any normal capital distribution that Keppel REIT typically reviews on a regular basis. Currently, Keppel REIT has more than S$400m in capital gains in the books.
  • We believe this is a bold (and rare) move from management to reward and share its years of gains accumulated from its asset recycling strategy with shareholders, especially in such a challenging environment. We believe this is a strong testament from management that it is exercising duty of care and loyalty to all stakeholders who have been supportive of the company.
  • Keppel REIT's 3Q22 estimated DPU is stable y-o-y at 1.47 cents, in line with our estimates.
  • Gearing inched up marginally to 38.4% vs 37.9% in 2Q22 and the interest rate hedge ratio remained stable at 72% vs 73% 2Q22.
  • Keppel REIT's all-in cost of debt has risen above 2% at 2.13% in 3Q22 vs 1.93% in 2Q22 due to rising interest rates. There is no debt refinancing remaining in FY22 and management expects to refinance debt expiries (19% of total debt) by early next year.
  • Income from Australia and South Korea is hedged for up to 18 months.

Riding on strong Singapore office upcycle and locking in leases as quickly as possible.

  • Keppel REIT's portfolio occupancy improved further to 96.8%, mainly from Singapore office. Management continues to ride on the strong leasing trend in Singapore to lock in leases, driving up occupancy in its Singapore portfolio to 98.2% (average). Australia, on the hand, experienced slightly slower activities, possibly due to the wet weather recently, but rents and incentives have been trending upwards.
  • Singapore vacancies are now almost fully backfilled.
    1. the DBS space is fully leased out and MBFC’s occupancy has reached 98.6% in 3Q22,
    2. SCB’s space is now 40% committed (one-third backfilled in 2Q22) with another 30% under advanced negotiations and documentation, and
    3. 8 Chifley’s occupancy remained stable q-o-q at 82%, and given softer leasing activities in 3Q22, management is considering building spec suites to cater to demand for smaller spaces.
  • Strong positive rental reversions remain for Singapore at 9.7% in 3Q22. Singapore reversions remained strong at +9.7% in 3Q22. Excluding a large tenant that expanded its space and renewed its lease early, rental reversions would have been more than 14% vs 11% in 1H22.
  • Management continues to be positive on the Singapore office sector despite tech demand having moderated and looks to lock in leases as quickly as possible as it leverages on the Singapore office upcycle. Given its leasing strategy, management expects some occupancies to hit 100% soon.
  • Leasing activities have started for Blue & Williams, which is already in advanced negotiations with a few prospective tenants. The building reached structural completion in Sep 22 and is on track to be completed by mid-2023.
  • Keppel REIT had previously raised its service charge by 25 cents in ORQ and MBFC to offset higher costs. It expects to roll out to OFC and Keppel Bay Tower from Nov 22 onwards.
  • Physical occupancy in Singapore has risen to an average of 70% to 80%, while Australia is still trending at 35% to 45%.

Keppel REIT - Valuation & Recommendation

  • We maintain our BUY rating on Keppel REITbut lower our target price to S$1.15 from S$1.40 to factor in higher risk-free rates, floating rates, and refinancing rates. Despite higher financing costs, we revised upwards our FY22F-FY23F DPU estimates by 0.5% to 1.8% to factor in the 20-year anniversary reward.
  • Despite the challenging environment and an uncertain macroeconomic outlook, we believe the management of Keppel REIT is making all the right moves to ensure the resilience of the portfolio, riding on the current Singapore office upcycle as it prepares to weather a “rainy” day.
  • With the heightened capital distribution, Keppel REIT is offering a 7% FY23F yield and trading at 0.7x P/B, slightly below -1 standard deviation of its historical range and close to trough levels in the past five years - very attractive valuation levels, in our view.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Rachel TAN DBS Group Research | Derek TAN DBS Research | 2022-10-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.15 DOWN 1.400

Previous report by DBS Research:
2022-01-26 Keppel REIT - The Force Awakens

Target prices by 3 other brokers at Keppel REIT Target Prices.
Listing of broker reports at Keppel REIT Analyst Report.

Relevant links:
Keppel REIT Share Price History,
Keppel REIT Announcements,
Keppel REIT Dividends & Corp Actions,
Keppel REIT News Articles


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