Keppel Real Estate Investment Trust (REIT) (SGX: K71U) boasts robust financial performance, attractive valuation, high occupancy rates, and a commitment to sustainability. With strong fundamentals and recent technical indicators supporting a buy recommendation (Read: Stock with Momentum: Keppel REIT – ProsperUs), Keppel REIT stands out as a prime choice for investors.
1. Attractive Valuation
As of July 16, 2024, Keppel REIT offers a distribution yield of around 6% and a five-year average dividend yield of 4.87%. Its price-to-book value ratio is 0.63x, suggesting undervaluation. We forecast a dividend yield of 7% for FY2024, rising to 7.2% for FY2025 and 7.3% for FY2026. Currently, the average target price from consensus is about S$1.004 for Keppel REIT.
2. Improved Property Performance
For Q1 2024, Keppel REIT reported a 6.3% year-over-year (y-o-y) increase in property income to S$61.3 million and a 7.2% y-o-y increase in net property income to S$48.2 million. This growth was driven by higher rentals from Ocean Financial Centre in Singapore and contributions from 2 Blue Street in Australia. Despite a 21.3% rise in borrowing costs, distributable income from operations remained steady at S$50.2 million.
3. High Occupancy Rates
Keppel REIT maintains a high portfolio committed occupancy of 96.4% across its 13 assets in Singapore, Australia, South Korea, and Japan as of Q1 2024. Key properties like Ocean Financial Centre in Singapore and various Australian assets, such as 8 Chifley Square and Victoria Police Centre, report full occupancy.
4. Positive Rental Reversion
In Q1 2024, Keppel REIT achieved a positive rental reversion of 10.9%, indicating that lease renewals are occurring at higher rates, which can drive income growth. Of its leases committed in 1Q 2024, 63.5% were renewals, while 36.5% were new. Management has a rental reversion guidance of high single digits for FY2024.
5. Healthy Debt Profile
As of March 31, 2024, Keppel REIT’s aggregate leverage stood at 39.4%, with 74% of borrowings on fixed rates, offering stability against interest rate fluctuations. Management expects interest costs to stay in the 3.5% to 3.75% range for FY2024. Additionally, the REIT has access to approximately $1.2 billion in available borrowing facilities.
6. Good Tenants and Long-Term Leases
Keppel REIT has a diversified tenant base of 460 tenants, with banking, insurance, and financial services making up 35.2% of its tenant mix. Keppel REIT also has a portfolio weighted average lease expiry (WALE) of 4.6 years, with the top 10 tenants’ WALE at 8.1 years. The REIT has a well-distributed lease expiry profile. The average signing rent for Singapore office leases in Q1 2024 was $12.30 per square foot per month (psf pm). The average expiring rents for Singapore office leases are $11.01 psf pm in 2024, $11.13 psf pm in 2025, and $11.99 psf pm in 2026.
7. Strategic Expansion
The acquisition of a 50% interest in 255 George Street in Sydney for A$363.8 million, completed in May 2024, is a strategic move to enhance long-term growth potential. This property, with a committed occupancy rate of 93% and a WALE of 6.8 years, promises stable rental income.
8. Commitment to Sustainability
Keppel REIT focuses on sustainability, with 63% of its borrowings linked to green financing as of March 31, 2024. The recent issuance of A$175 million in green notes will help fund its acquisition of 255 George Street, Sydney. Additionally, all its properties, except for 2 Blue Street, are green-certified.
Downside Risks
Potential risks include longer-than-expected vacancies from tenant movements and reduced demand for office space due to hybrid work environments.
Company Overview
Keppel REIT is the only pure office REIT on the Singapore Exchange (SGX) and is a recognized blue-chip Singapore REIT. Since its listing in 2006, it has expanded from four assets in Singapore to a portfolio valued at $9.2 billion across Asia Pacific as of March 2024. This portfolio includes 79.3% of assets in Singapore, 16.5% in Australia, 3.3% in South Korea, and 0.9% in Japan. Sponsored by Keppel Land Ltd and managed by Keppel REIT Management Ltd, its major shareholder is Temasek Holdings Pte Ltd, holding a 38% stake.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of the company mentioned.
References
Keppel REIT’s Presentation | 24 June 2024
Keppel REIT to acquire 50% interest in Sydney freehold Grade A office building for A$363.8 million
CGS Note – Keppel REIT | April 23, 2024
