Maybank Investment Bank Bhd (Maybank IB) lowers its distribution per unit (DPU) estimates by between 2% and 4% for Keppel Real Estate Investment Trust’s (Keppel REIT) after factoring in potentially lower occupancy and effective rents and higher borrowing cost.
In its research note today (Feb 2), the research house said combined with lower discount rate, it kept its BUY rating and unchanged dividend discount model target price (DDM-TP) of SGD1, implying 15% total return.
“The REIT offers exposure to high grade central business district (CBD) offices at 6.3% yield and 30% discount to book, pricing it at lower end of historical ranges,” it said.
Maybank IB said the leading REIT listed on the Singapore Exchange that invests in income-producing properties used primarily for office purposes reported a DPU of SGD5.8 cents for the FY2023 ended Dec 31, 2023, which is 2% lower year-on-year (YoY).
“The REIT’s DPU was 2% below our full year estimates, as well as the consensus.”
The research house said its organic growth (from operational gains) was offset by higher borrowing costs.
“The second half 2H revenue and net property income (NPI) of SGD118.2 million and SGD92.5 million were up 7.9% and 6.9% YoY, respectively.
“Attributable NPI of associates and joint ventures (JVs) for the period rose 10.7% YoY. Rental support of SGD7 million from Blue & William also supported contribution.
“The topline growth was offset by higher borrowing cost resulting in a 0.7% lower distributable income and 1.7% fall in DPU. For the full year, trends were similar.
“A 6% drop in distribution from operation was offset by SGD20 million of anniversary distribution compared to SGD10 million last fiscal year
resulting in a 2% lower DPU,” it said.
The research house said the REIT’s portfolio occupancy rose sequentially to 97.1% compared to 95.9% in the last quarter.
“For for the full financial year of 2023 (FY23), high single-digit positive reversion was achieved at +9.9%. Committed occupancy for Blue & William, which is an office space in North Sydney, Australia under its portfolio, rose to 66.4% from 42.5% in 3Q,” it said.
However, Maybank IB said Keppel REIT is prudence in capital management and has a stable portfolio.
“Portfolio value rose 0.8% led by 1% higher value for Singapore offices. Australian portfolio was down 1.5% in local currency while Japan and Korea office values rose by a mid-to-high single digit percentage.
“Notwithstanding the higher portfolio value, gearing was 38.9%, about 50 basis points (bps) higher than last year. All-in interest rate was 2.89% and fixed rate hedge ratio was 75%. Manager intends to keep its hedge ratio relatively unchanged.”
Ultimately, the research house said that the REIT still has resilient operations.
“While transitional vacancy may creep up, lowering distribution from operations, top-ups will mitigate the impact.”
The risks to its call include dilutive capital raising, non-renewal of anchor leases, hybrid work pattern and higher interest costs.
