Keppel REIT - OCBC Investment 2023-04-20: Positive Operating Metrics But Headwinds From Borrowing Costs.

• Keppel REIT (SGX:K71U)’s 1Q23 net property income (NPI) and NPI attributable to unitholders increased by 1.8% and 1.3% y-o-y to S$45.0m and S$40.5m, respectively. Distributable Income (DI) from operations fell 6.7% y-o-y to S$50.2m due mainly to lower interest income and higher borrowing costs. See Keppel REIT's announcement dated 19 Apr 2023.
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Rental reversions still solid at 9.3%, but likely to moderate for remainder of FY23

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• According to CBRE Research’s data, core CBD Grade A office rent increased at a slower pace of 0.4% q-o-q in 1Q23 to S$11.75 psf pm, which is close to the S$11.66 psf pm average expiring rents for Keppel REIT’s Singapore office leases. This suggests that rental reversions are likely to moderate ahead.
• Keppel REIT has already backfilled ~90% of the space vacated by Standard Chartered Bank, with a fair amount of take-up coming from new demand. Management expects to complete its backfilling exercise by 2Q or 3Q of FY23.
• On another positive note, while there have been negative headline news surrounding the tech sector, some of Keppel REIT’s tech tenants have expanded, and even hired some of the employees who were laid off from other tech companies.
• For Keppel REIT’s overseas assets, T Tower in Korea had some transitory vacancies, but the overall market remains strong. Its Blue & William property in Sydney obtained practical completion on 3 Apr 2023. While committed occupancy is approximately one-third, the property has a 3-year rental guarantee on unlet space from the practical completion date and hence should start contributing to Keppel REIT’s income from 2Q23.

Aggregate leverage ratio inched up to 38.7%, while borrowing costs also unsurprisingly increased

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OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2023-04-20 SGinvestors.io

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